# Wave’ of lawsuits over FTX expected, but investors will face legal hurdles
Author:  Pal Sinha, Barnali 
Author URL: https://financedigest.com/author/pal-sinha-barnali
Published: 2022-11-18
Category: NEWS
Category URL: https://financedigest.com/category/news
Meta Title: FTX Cryptocurrency Exchange Faces Lawsuits Over
Meta Description: Learn about the lawsuit against FTX and its founder, Sam Bankman-Fried, over alleged deceptive practices and unregistered securities.
URL: https://financedigest.com/wave-of-lawsuits-over-ftx-expected-but-investors-will-face-legal-hurdleshtml

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By Jody Godoy

(Reuters) – A lawsuit by FTX account holders in the United States is likely the first of many that will be brought over billions of dollars in losses on the cryptocurrency exchange, though the cases will face obstacles including proving that U.S. securities law applies to FTX’s products, experts said.

The lawsuit, filed in Miami federal court on Tuesday, claims FTX founder Sam Bankman-Fried and celebrities including NFL quarterback Tom Brady and basketball Hall of Famer Shaquille O’Neal, engaged in deceptive [business practices](https://www.financedigest.com/exact-launches-practice-management-solution-to-help-transform-accountants-into-trusted-business-advisors.html "Exact launches Practice Management solution to help transform accountants into trusted business advisors") by promoting unregistered securities.

While some courts have ruled that certain cryptocurrencies fit the [legal definition of securities](https://www.financedigest.com/what-does-good-look-like-for-legal-sector-it-security.html "What does ‘good’ look like for legal sector IT security?"), the issue remains unsettled.

Cases against FTX, which is based in the Bahamas, will be made more complex by the fact that U.S. [securities laws generally apply only to domestic transactions](https://www.financedigest.com/rambus-unveils-vaultify-trade-for-secure-transaction-and-storage-of-crypto-assets-on-blockchain.html "Rambus Unveils Vaultify Trade for Secure Transaction and Storage of Crypto Assets on Blockchain"), said Yuliya Guseva, a professor who heads the fintech and blockchain research program at Rutgers Law School.

It is more complicated than your plain vanilla [crypto exchange](https://www.financedigest.com/exclusive-binance-moved-346-million-for-seized-crypto-exchange-bitzlato-data-show.html "Exclusive-Binance moved 6 million for seized crypto exchange Bitzlato, data show") story,” she said.

Representatives for Bankman-Fried, O’Neal and Brady did not reply to requests for comment on the lawsuit.

FTX [filed for bankruptcy](https://www.financedigest.com/movie-chain-operator-cineworld-files-for-u-s-bankruptcy.html "Movie chain operator Cineworld files for U.S. bankruptcy") on Nov. 11 and is facing scrutiny from U.S. authorities. Sources told Reuters that $10 [billion in customer assets were shifted from FTX to Bankman-Fried’s trading company Alameda Research, and that more than $1 billion of customer funds](https://www.financedigest.com/uk-investors-add-1-2-billion-to-equity-funds-in-march-calastone.html "UK investors add .2 billion to equity funds in March – Calastone") is missing.

Tuesday’s lawsuit, a proposed class action brought on behalf of FTX yield-bearing account holders in the United States, claims the accounts were unregistered securities because they used [investors’ pooled funds to engage in activities that generated the returns](https://www.financedigest.com/certainty-in-an-uncertain-world-post-brexit-investors-turn-to-commercial-property-and-fixed-returns.html "Certainty in an uncertain world – post-Brexit investors turn to commercial property and fixed returns") account holders received.

It is an open question whether U.S. securities laws apply to interest-bearing crypto [accounts like those offered](https://www.financedigest.com/accountants-can-add-even-value-offering-clients-new-breakeven-cis-calculators-downloadable-app.html "Accountants Can Add Even More Value by Offering Clients New Breakeven and CIS Calculators from Their Own Downloadable App") by FTX.

The U.S. Securities and [Exchange](https://www.financedigest.com/vaultbank-exchange-launches-in-beta-opening-security-tokens-for-trading.html "Vaultbank Exchange Launches in Beta, Opening Security Tokens for Trading") Commission has recently alleged that other yield-bearing accounts constituted unregistered securities. [Investors have made similar allegations in court](https://www.financedigest.com/glencore-courts-120-teck-investors-for-bid-backing-as-spinoff-vote-looms-source.html "Glencore courts 120 Teck investors for bid backing as spinoff vote looms -source") against Voyager Digital Ltd and Celsius Network over their crypto accounts, but judges have yet to rule on those claims.

The lawsuit filed on Tuesday did not name FTX as a defendant but instead targeted individuals.

Other [investors will likely bring](https://www.financedigest.com/worlds-best-islands-bring-holidaymakers-and-investors-flocking-to-the-philippines.html "‘World’s best islands’ bring holidaymakers and investors flocking to the Philippines") more lawsuits as the details of FTX’s collapse come to light.

Guseva said a “wave” of litigation is the “expected result of a large debacle like this.”

FTX’s new CEO, John J. Ray III, said in bankruptcy filings on Thursday that the company’s situation was “unprecedented” and involved a “complete [failure of corporate](https://www.financedigest.com/hmrcs-newfound-status-as-preferential-creditor-on-corporate-failures-represents-another-potential-drain-on-the-resources-of-the-ppf.html "HMRC’s newfound status as preferential creditor on corporate failures represents another potential drain on the resources of the PPF") controls.

[Cases against FTX and related companies](https://www.financedigest.com/finance-industry-one-court-case-away-claims-management-company-onslaught-quadient-warns.html "Finance Industry Is “One Court Case Away” from Claims Management Company Onslaught, Quadient Warns") will be paused during bankruptcy proceedings, but cases against individuals who have not filed for bankruptcy may be allowed to go forward, said Guseva.

Several law [firms have said they are considering](https://www.financedigest.com/pizza-firm-dp-eurasia-considers-divestment-of-russian-business.html "Pizza firm DP Eurasia considers divestment of Russian business") bringing claims on behalf of investors in the FTX Token, or FTT, a cryptocurrency tied to the exchange whose value has plummeted from around $25 per token to less than $2 in the wake of the FTX liquidity crisis.

New lawsuits may also target celebrity promoters of FTX crypto products.

Tuesday’s complaint alleges that such [promoters violated Florida consumer protection law by failing to disclose what they were paid](https://www.financedigest.com/organic-vs-paid-promotion-why-the-perfect-mix-eludes-you.html "Organic VS Paid Promotion: Why the perfect mix eludes you") to endorse the company.

Investors have brought similar claims against [reality TV star Kim Kardashian over her promotion of EthereumMax tokens](https://www.financedigest.com/decentraland-announces-anticipated-token-sale-for-massive-virtual-reality-economy.html "Decentraland Announces Anticipated Token Sale for Massive Virtual Reality Economy"). A judge has not yet ruled on whether the case can go forward.

Kardashian has argued that the lawsuit should be dismissed because compensation details would not have mattered to investors in the token.

She [settled similar claims](https://www.financedigest.com/cvs-walmart-walgreens-agree-to-pay-13-8-billion-to-settle-u-s-opioid-claims-sources.html "CVS, Walmart, Walgreens agree to pay .8 billion to settle U.S. opioid claims – sources") earlier this year by the SEC for $1.26 million without admitting wrongdoing.

Future [investor lawsuits](https://www.financedigest.com/institutional-investors-back-shell-board-lawsuit-over-climate-risk.html "Institutional investors back Shell board lawsuit over climate risk") over the FTX meltdown are likely to allege claims beyond securities registration and consumer protection violations, plaintiffs’ attorneys said.

Sean Masson, an attorney at [law firm](https://www.financedigest.com/international-law-firm-calls-in-viato-connect-uk-and-us-offices.html "INTERNATIONAL LAW FIRM CALLS IN VIATO CONNECT UK AND US OFFICES") Scott+Scott who represents investors in the case against Kardashian, said there may be potential market manipulation claims based on Bankman-Fried’s activities at Alameda.

Masson did not provide specifics. Market manipulation involves a trader or company [attempting](https://www.financedigest.com/jittery-markets-attempt-risk-on-rally-while-waiting-for-powell.html "Jittery markets attempt risk-on rally while waiting for Powell") to secretly move or maintain the market price of a security or commodity.

“We think that what has come out so far is just scratching the surface on what truly happened,” he said.

(This story has been refiled to fix typographical error in paragraph 13)

(Reporting by Jody Godoy in New York; Editing by Noeleen Walder and Matthew Lewis)


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