FTX Creditor Litigation Parallels to Enron/WorldCom

BY: Evan Paul, RBFL Editor

The collapse of cryptocurrency exchange FTX Trading Ltd. (“FTX”) due to its co-mingling of assets with Alameda Research LLC (“Alameda”) has resulted in a plethora of litigation by those seeking recovery of lost assets. On the more traditional end, this includes bankruptcy proceedings, civil actions by the Securities and Exchange Commission, the Commodities Futures Trading Commission, and creditor lawsuits against FTX executives individually. Additionally, a number of lawsuits have been filed by FTX creditors against third parties who are alleged to have perpetuated or facilitated the ongoing fraud at FTX. These include claims by crypto investors against Alameda, FTX’s two auditors, and a bank the two companies had a relationship with. These latter sorts of suits have been characterized as reminiscent of those after the collapses of Enron and WorldCom in that recovery is sought from third parties who enabled the fraud—there also auditors and banks. In the case of FTX, this group of alleged enablers also includes celebrity endorsers and corporate sponsors.

A handful of lawsuits in the Southern District of Florida have targeted not only FTX executives individually but also celebrities or corporate sponsors who endorsed the cryptocurrency exchange, including the Golden State Warriors and a number of professional athletes. These cases allege civil conspiracy as well as violations of the Florida Securities and Investor Protection Act and the Florida Deceptive and Unfair Trade Practices Act.

Two lawsuits in the Northern District of California name as defendants—in addition to FTX and Alameda executives individually, and in one case endorsers like the Golden State Warriors—FTX’s auditors, Armanino LLP (“Armanino”) and Prager Metis CPAs, LLC (“Prager Metis”). The plaintiffs allege that the auditors facilitated and covered up the ongoing fraud at FTX in the face of obvious red flags. These suits are similar to claims against Arthur Andersen LLP in the wake of the collapses of Enron and WorldCom. Arthur Andersen was the auditor for both companies and in both cases was alleged to have facilitated the underlying fraud. The accounting firm entered into substantial settlements with shareholder plaintiffs in both cases.

A final set of cases in the Southern District of California have also been filed against Silvergate Bank and Silvergate Capital Corporation (“Silvergate”), which are alleged to have aided and abetted FTX’s fraud by assisting in the commingling of funds with Alameda. These suits are reminiscent of the lawsuits against various banks involved in the Enron and WorldCom scandals, many of which ended up settling—in the case of Citigroup and J.P. Morgan, to the tune of billions of dollars.

While many of these cases against third parties are still in the early stages, the settlements by auditors and banks in the wake of the Enron and WorldCom scandals likely bode well for claims by FTX creditors against Armanino, Prager Metis, and Silvergate.

Key Sources

Justin Wise, FTX Customers Take Enron, WorldCom Path in Legal Fight for Cash, Bloomberg Law, January 6, 2023, https://news.bloomberglaw.com/business-and-practice/ftx-customers-take-enron-worldcom-path-in-legal-fight-for-cash.

Petitioner’s Motion for Transfer of Related Actions to the Southern District of Florida, ECF No. 1, at 2 n.1, In re: FTX Cryptocurrency Exchange Collapse Litigation, No. 3076 (J.P.M.L. Feb. 10, 2023).

Carolina Bolado, FTX Leader, Sports Stars Hit With Investor Suit Over Collapse, Law360, Nov. 16, 2022, https://www.law360.com/articles/1550002?scroll=1&related=1.

Complaint, ECF No. 1, v. Bankman-Fried et al., No. 3:22-cv-07444-JSC (N.D. Cal. Nov. 3, 2022).

Complaint, ECF No. 1, Gonzalez et al. v. Silvergate Bank et. al., No. 3:22-cv-1981 (S.D. Cal. Dec 14, 2022).

Scott Siamas, Primary Securities Fraud Liability for Secondary Actors: Revisiting Central Bank of Denver in the Wake of Enron, Worldcom, and Arthur Andersen, 37 C. Davis L. Rev. 895, 921 (2004).

Vaughn K. Reynolds, The Citigroup and J.P. Morgan Chase Enron Settlements: The Impact on the Financial Industry, 8 N.C. Banking Inst. 247 (2004), http://scholarship.law.unc.edu/ncbi/vol8/iss1/12.

Jeffrey A. Barrack, Auditor Responsibility Under the Federal Securities Laws: A Note from the Worldcom Securities Litigation, 29 J. Trial Advoc. 1 (2005)

Nicola White, FTX Collapse Puts Auditors in Crosshairs of Clients, Regulators, Bloomberg Tax, Nov. 30, 2022, https://news.bloombergtax.com/financial-accounting/ftx-collapse-puts-auditors-in-crosshairs-of-clients-regulator

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