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Another week in crypto is dominated by the collapse of FTX, whose celebrity endorsers are now facing a class action lawsuit. Meanwhile, the contagion spreads to FTX partners Genesis and BlockFi.
Less than a week after FTX filed for bankruptcy, a class action lawsuit against former CEO Sam Bankman-Fried has surfaced, also targeting multiple A-list celebrities who helped to promote the exchange.
Filed on Tuesday (November 15) in the Southern District of Florida, the class action is led by plaintiff Edwin Garrison, a resident of Oklahoma who purchased unregistered securities in the form of yield-bearing crypto-assets via FTX.
In the complaint, Garrison is said to have purchased these products after being exposed to the defendants’ “misrepresentations and omissions” regarding the FTX platform.
As a result, Garrison suffered material damages for which he seeks to hold the defendants liable.
Aside from Bankman-Fried, the list of defendants named in the complaint reads like a who’s who of America’s sports, fashion and entertainment industry.
NFL star Tom Brady is named first, followed by his supermodel ex-wife Giselle Bundchen. Others include NBA stars Steph Curry and Shaquille O’Neal, tennis player Naomi Osaka, ‘Curb Your Enthusiasm’ actor Larry David and several others.
The list of those named is by no means exhaustive and the complaint seeks to establish liability for “all parties” who either controlled, promoted or participated in FTX’s business activities.
“The deceptive FTX Platform maintained by the FTX Entities was truly a house of cards, a Ponzi scheme where the FTX Entities shuffled customer funds between their opaque affiliated entities,” the complaint alleges.
In addition to fraud and deception, the plaintiff’s lawyers allege that FTX’s celebrity backers should be held in violation of the anti-touting provisions of federal securities laws, due to their failure to disclose a material interest in the FTX platform while promoting it.
The plaintiff’s lawyers cite the case of Kim Kardashian, who was fined $1.26m last month by the Securities and Exchange Commission (SEC) for failing to disclose a paid cryptocurrency promotion, as precedent.
Similar complaints against boxer Floyd Mayweather and musician DJ Khaled were settled with the SEC in 2018 for over $600,000 and $150,000 respectively.
FTX equity wipeout
In addition to the class action lawsuit, FTX’s celebrity backers are also facing a wipeout of their FTX equity value.
As noted in the complaint, FTX press releases from 2021 confirm that the celebrity promoters received FTX equity and payment in cryptocurrency for services rendered.
It is not known how much each celebrity was paid for their endorsement, but it is known that in September 2021, several months after Brady, Bundschen and Curry signed “long-term partnerships” with FTX, the exchange was valued at $32bn.
It is also estimated that FTX spent $135m on the naming rights to FTX Arena, home of the Miami Heat basketball team, and spent over $20m on its Super Bowl LVI commercial.
One company that invested in FTX equity following the $32bn valuation was Temasek, Singapore’s sovereign wealth fund, which spent a combined $265m on equity in FTX International and FTX US.
As of this week, however, Temasek has opted to write down its entire investment in FTX, irrespective of the outcome of its bankruptcy proceedings.
Temasek’s decision follows a similar announcement from hedge fund Sequoia Capital, which last week wrote down its entire $214m stake in FTX.
Interestingly, at the time of their original investment, both firms referred to the healthy balance sheet and profitability of FTX.
Temasek, for example, said it spent eight months performing due diligence on FTX during 2021, reviewing its audited financial statements and finding it to be profitable.
Sequoia, likewise, said FTX reported $1bn in revenue and $250m in operating income for the full year in 2021.
Currently, however, the FTX balance sheet is looking rather less healthy than when Temasek and Sequoia first studied it.
As of last week, as shown by a balance sheet obtained by FT, FTX’s total liquid assets came in at $900m, and its total liabilities at $9bn.
Notably, more than half ($470m) of FTX’s liquid assets are made up of shares in Robinhood, the US stock trading app that went public last year and reported net losses of $3.4bn in 2021.
FTX contagion continues
Elsewhere in the crypto world, the FTX contagion has spread to smaller FTX partners, which are now facing liquidity crises of their own.
On Wednesday (November 16), Genesis, an institutional digital asset trading and credit firm, suspended withdrawals from its lending platform.
“FTX has created unprecedented market turmoil, resulting in abnormal withdrawal requests which have exceeded our current liquidity,” the company said in a statement, speaking on behalf of lending entity Genesis Global Capital.
“Our #1 priority is to serve our clients and preserve their assets. Therefore, in consultation with our professional financial advisors and counsel, we have taken the difficult decision to temporarily suspend redemptions and new loan originations in the lending business.”
According to the Genesis website, its lending arm had $2.8bn in active loans at the end of Q3 this year.
Following the withdrawal freeze at Genesis Global Capital, its impact was felt at Gemini, the US-based crypto exchange owned by Tyler and Cameron Winklevoss.
Gemini offers yield-bearing products via its Gemini Earn programme, but the yield is generated through the interest paid on loans taken out via Genesis Global Capital.
Due its lending partner relationship with Genesis, Gemini also froze withdrawals from its yield-bearing Earn products.
“The past week has been an incredibly challenging and stressful time for our industry,” Gemini said in a statement.
“We are disappointed that the Earn program service-level agreement will not be met, but we are encouraged by Genesis’ and its parent company Digital Currency Group’s (DCG) commitment to doing everything in their power to fulfil their obligations to customers under the Earn program.”
Last week, Genesis also reported that its derivatives business has about $175m of “locked funds” in an FTX trading account — as confirmed by the FTX balance sheet cited above.
As reported by CoinDesk, last week Genesis parent company DCG sent a $140m “equity infusion” to strengthen the company’s balance sheet while the funds remain locked. It is worth noting also that CoinDesk is also a wholly owned subsidiary of DCG.
BlockFi bars the doors
The final FTX domino seen falling over the past week was that of crypto lending platform BlockFi.
Following the collapse of the Terra-LUNA stablecoin and crypto lender Celsius earlier this year, BlockFi appeared to have survived the worst of crypto’s previous liquidity crunch, after signing a $250m term sheet with FTX.
As with the Genesis locked funds mentioned above, the BlockFi credit facility was also listed as a liability — now worth $215m — on FTX’s latest balance sheet.
Last week, following FTX’s bankruptcy filing, BlockFi released a statement saying it could “no longer operate our business as usual”.
In light of liquidity concerns, BlockFi paused all customer withdrawals from the platform and asked customers not to deposit any additional funds.
This week, BlockFi said withdrawals will remain paused while it considers its options.
“Given that FTX and its affiliates are now in bankruptcy, the most prudent decision for us, in the interest of all clients, is to continue to pause many of our platform activities for now,” BlockFi said in a statement.
It claimed that although it was significantly exposed to FTX and its associated corporate entities, “the rumors that a majority of BlockFi assets are custodied at FTX are false.”
It remains to be seen how BlockFi can survive without its FTX credit facility intact and according to sources close to BlockFi who spoke with Bloomberg this week, BlockFi is also preparing to file for bankruptcy in a matter of days.
