Cryptocurrency has always been purported to be a risky investment by most prominent financial authorities. In September, Forbes Advisor published an article entitled “Crypto Winter is Here” detailing how, at that point, Bitcoin was 65 percent off its November 2021 high, and Ethereum, Cardana and Polygon were all off more than 59 percent year to date.1 The money lost by crypto investors in 2022 has been staggering. As crypto bankruptcies have hit the US courts, the inner workings of these companies have come under scrutiny and what that scrutiny is revealing is even more concerning for investors.
In May 2022, crypto hedge fund Three Arrows Capital (3AC) went bankrupt due to the collapse of cryptocurrencies Luna and TerraUSD, wiping out $42 million in investor value.2 Celsius Network, a crypto lender filed for bankruptcy in July and since then has been “embroiled in disputes over fraud investigations, disparate treatment of customer accounts, customer privacy, and its spending on a new bitcoin mining facility, with a bankruptcy judge appointing an examiner to investigate whether Celsius operated as a Ponzi scheme.”3 In June, crypto lender Voyager filed for bankruptcy after 3AC defaulted on a crypto loan worth more than $650 million. Voyager reached an agreement in September to sell its assets for $1.4 billion in crypto to FTX Exchange. FTX, as of July of 2021, was the world’s third largest centralized cryptocurrency exchange.4
An MIT graduate and former Jane Street Capital international exchange-traded funds trader Sam Bankman-Fried founded FTX Exchange in 2018. The company offered a range of trading products, including derivatives, options, volatility products, and leveraged tokens while also providing spot markets, where traders can buy and sell cryptocurrencies for immediate delivery, in more than 300 cryptocurrency trading pairs such as BTC/USDT, ETH/USDT, XRP/USDT, and its native token FTT/USDT.5 The company started 2022 with a $32 billion valuation, its name on the arena of the NBA’s Miami Heat, and purported itself to have more than a million users.6
On November 11, FTX Group filed for voluntary Chapter 11 bankruptcy protection in a Delaware court. Chapter 11 bankruptcy protection will allow FTX to continue day-to-day operations and restructure its operations. In a Chapter 7 bankruptcy a company must liquidate its assets. FTX Group entities include FTX.com, FTX US, Alameda Research and approximately 130 additional affiliated companies. When the bankruptcy was announced, founder and CEO Bankman-Fried stepped down and John Jay Ray III, became the new chief restructuring officer and CEO. Ray testified in a House hearing on December 13 that FTX exhibited a case of old-fashioned embezzlement and that investors and creditors are unlikely to get all their money back.7 He attributed the exchange’s collapse to “a complete failure of corporate control.”
Bankman-Fried was extradited to the U.S. from the Bahamas after the U.S. Attorney for the Southern District of New York presented Bahamian authorities with a sealed indictment. Bankman-Fried was indicted by the U.S. District Court in Manhattan on eight counts, including securities fraud and money launderings. U.S. Attorney for the Southern District of New York Damian Williams cited this case as one of the biggest frauds in financial history.8 In addition, hours after FTX filed for bankruptcy an alleged cybercrime drained more than $370 million from the crypto exchange.9 The incident is currently under Federal investigation.
A class-action lawsuit was filed with the U.S. Bankruptcy Court for the District of Delaware on December 27 by a group of FTX users who want the court to grant FTX customers priority repayment of customer property and to declare that any customer property held on behalf of customers doesn’t belong to the company. The lawsuit alleges that FTX has misplaced up to $2 billion worth of customer digital assets.10 The group that filed the lawsuit claims that they haven’t been able to complete a withdrawal of stored cash and digital assets on FTX’s platform since early November.
FTX investors who have incurred losses and whose brokers / financial advisors recommended FTX to them should consult a qualified securities attorney as they may have legal rights to seek restitution from FTX and their broker/financial advisor.
Our Michigan Securities Law Firm has been fighting for investor’s rights with success by holding negligent brokers accountable. If you think your investment accounts have been compromised or mismanaged, contact our Detroit area Securities Firm today and speak with an attorney.
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1Crypto Winter is Here: What You Need to Know by Farran Powell, 9/2/2022
Link: https://www.forbes.com/advisor/investing/cryptocurrency/what-is-crypto-winter/
2.3,6 Factbox: Crypto Companies Crash into Bankruptcy by Dietrich Knauth, 12/1/2022
Link: https://www.reuters.com/technology/crypto-companies-crash-into-bankruptcy-2022-12-01/
4,5,7,8 What is FTX? by Timothy Smith, Updated 12/22/2022
Link: https://www.investopedia.com/ftx-exchange-5200842
9 US Probes How $370 Million Vanished in Hack after FTX Bankruptcy, 12/27/2022
Link: https://www.foxbusiness.com/technology/us-probes-370-million-vanished-hack-ftx-bankruptcy
10 FTX Customers File Lawsuit Seeking to Recover Crypto Assets, by Khristopher J. Brooks, 12/28/2022
Link: https://www.msn.com/en-us/money/companies/ftx-customers-file-lawsuit-seeking-to-recover-crypto-assets/ar-AA15KvJr