Author: Alexandra Andhov, Forbes; Translator: Baishui, Golden Finance
As the bankruptcy estate of FTX seeks to recover funds for creditors, it has filed 23 new lawsuits against entities such as Binance, Anthony Scaramucci, SkyBridge Capital, Crypto.com and even Mark Zuckerberg-backed lobbying group Fwd.us.
The lawsuits add to a growing list of legal actions aimed at recovering billions of dollars in losses caused by the dramatic collapse of cryptocurrency exchanges. Perhaps the most significant lawsuit is the $1.76 billion lawsuit against Binance and its former CEO Changpeng Zhao.
The focus turns to the question on many people's minds: What does this mean for FTX's defrauded investors? In 2022, FTX went from a respected and trusted cryptocurrency exchange to a bankrupt disgrace, losing more than $8 billion in investor funds. As such, this new lawsuit may offer a glimmer of hope for the thousands who lost funds in the FTX crash - but the path to recovery is far from certain.
Allegations
The lawsuit alleges that the funds transferred to these organizations were part of a larger “influence buying campaign” orchestrated by FTX founder Sam Bankman-Fried. According to the filing, Bankman-Fried poured money into sponsorships, investments, and donations to boost his reputation in politics and traditional finance while obscuring FTX’s growing financial instability.For example:
SkyBridge Capital and Scaramucci:FTX acquired a 30% stake in SkyBridge in September 2022, just months before the company collapsed. Additionally, FTX spent $12 million to sponsor Scaramucci’s SALT conference and invested $10 million in SkyBridge’s Coin Fund. In return, Scaramucci allegedly helped Bankman-Fried pitch potential investors, even loaning him a suit and tie for meetings to enhance his professional image.
Fwd.us and Alameda Research:The payments to lobbying group Fwd.us are described as part of a coordinated effort to siphon money away from FTX creditors and boost the personal reputations of FTX insiders.
The lawsuit alleges that the payouts provided “little to no benefit” to FTX or its creditors and were primarily designed to maintain the illusion of financial stability as the company grappled with a severe hole in its balance sheet. However, the courts may examine whether the responsibility for assessing the cost-benefit ratio of these decisions lies with the service providers or with the company’s management — Mr. Bankman-Fried and his board of directors?
What does this mean for defrauded investors?
For the thousands of retail investors and customers who lost money, these lawsuits are an important part of the bankruptcy agency’s strategy to recover assets. To date, the bankruptcy agency has filed 23 lawsuits (with more likely to come) seeking to recover billions of dollars from numerous entities. If successful, even partially, these recovered funds could significantly increase the pool of assets available for distribution to investors.
However, the process is challenging:
Proving intent and misuse: The key to many of these cases is proving that funds were intentionally misused or diverted without legitimate business reason. This can be difficult, especially when the transactions involve high-profile partnerships and investments.
Scope of recovery: Even if these lawsuits are successful, they may only recover a small portion of the estimated $8 billion in investor losses. Recovered funds will also be subject to administrative costs, bankruptcy expenses, and competing creditor claims.
Investor’s Perspective: Confidence in Cryptocurrency
The collapse of FTX and the ongoing litigation highlight deeper problems in the cryptocurrency industry. For many defrauded investors, the issue is not just about recovering funds, but about rebuilding trust. The collapse of FTX revealed systemic governance failures, misuse of investor and customer deposits, and inadequate regulatory oversight. These issues have shaken confidence in the entire cryptocurrency market.
As such, these lawsuits are not just about holding FTX accountable for its collapse, but also about setting a precedent for investor protection. If the case is successful, it could herald a shift toward greater transparency and regulation, providing some comfort to cryptocurrency investors.
Benefits not just investors, but the industry
If FTX's assets prove its claims, it could potentially recoup a significant portion of the funds lost in the stock buyback. However, the complexity of bankruptcy proceedings, legal challenges in proving intent, and a multitude of competing claims mean any recovery is likely to be slow. For defrauded investors, the lawsuit is a key chapter in the saga of FTX's collapse. While it may not result in full restitution, it represents an important step toward accountability in an industry often criticized for its lack of safeguards. Whether the case ultimately leads to meaningful results for those who lost their savings remains to be seen.
Before its collapse in late 2022, FTX, led by founder Sam Bankman-Fried, was seen as a game-changer for the cryptocurrency industry. Bankman-Fried was later sentenced to 25 years in prison for defrauding clients of $8 billion, though he has appealed the verdict. Meanwhile, Zhao Changpeng was sentenced to four months in prison earlier this year for violating U.S. anti-money laundering laws, and Binance, like many other cryptocurrency companies, has seen its reputation increasingly questioned.
While FTX’s legal team seeks damages, the question remains: Will defrauded investors be able to recoup the billions they lost? The bigger question, however, is whether the industry will learn from these cases.
The Crypto Industry and Blue Sky Laws
The entire story could be a turning point for the cryptocurrency industry, nudging it toward the kind of regulation that transformed U.S. stock exchanges a century ago.
Like the era before Blue Sky laws, when unregulated securities markets led to rampant fraud and mismanagement — effectively selling a slice of the blue sky — the cryptocurrency industry has largely operated in the shadow of regulation. (Golden Finance Note: Blue Sky Laws can also be translated as "Blue Sky Laws", which is a general term for securities laws enacted by states in the United States. It is said that at the beginning of this century, securities promotion was extremely chaotic. If it was not managed, even the blue sky would be sold one day. Therefore, the securities management laws enacted by various states are called blue sky laws. The first blue sky law was enacted by Kansas in 1911.)
The introduction of blue sky laws in the early 20th century actually marked some legitimacy for this fraud-ridden industry. This is exactly what many cryptocurrency companies do not realize or recognize - yes, we can be excited about innovation and oppose any regulation, but it is regulation that opens the door to the market.
Blue sky laws require transparency and accountability, ultimately restoring investor trust and stabilizing financial markets. Similarly, the scrutiny brought about by the collapse of FTX may catalyze the establishment of a clearer regulatory framework for cryptocurrencies, creating a safer and more reliable market for investors.
The question is not only whether defrauded creditors can recoup the billions they lost, but whether this moment can pave the way for a more sustainable, trustworthy crypto industry. As the legal battles drag on, the possibility of systemic change hangs in the balance, offering hope not only for investors but for the future of cryptocurrencies themselves.
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