At its peak, crypto giant FTX was so big that it attracted celebrities such as tennis pro Naomi Osaka and actor Larry David to promote its brand. Now its collapse is shining a critical light on the industry — and also drawing stars into a lawsuit.
A legal complaint filed this week in Miami accuses now-bankrupt FTX and its CEO Sam Bankman-Fried of misleading consumers into investing.
The class action, which has yet to be confirmed by a court, also names 12 celebrity “brand ambassadors” as defendants, including Osaka, David, quarterback Tom Brady, model Giselle Bündchen, former basketball player Shaquille O’Neal and a Canadian businessman. Kevin O’Leary.
But the celebrity-studded legal complaint is just one chapter in the saga of the collapsing crypto exchange Bankman-Fried, which filed for bankruptcy on Nov. 11.
Once valued at $32 billion, the three-year-old empire—FTX, FTX.US, and a trading firm called Alameda Research—is quickly becoming another crypto cautionary tale.
Bankman-Fried oscillates from remorseful to defiant in tweets sent from his home in the Bahamas as he says he will raise $8 billion to fix FTX, then told a Vox reporter: “F–k regulators [they] make everything worse.”
Details of FTX’s meteoric fall emerge in bankruptcy proceedings.
20) I was on the cover of every magazine and FTX was the darling of Silicon Valley.
We were too confident and careless.
“Complete control failure”
John J. Ray, FTX’s new court-appointed CEO, says he has overseen many corporate failures in his 40-year career, including the collapse of Enron, but said this week: “Never in my career have I seen such a complete failure of corporate controls and a total absence of credible financial information that occurred here.”
London-based crypto blogger David Gerard spoke with CBC’s Current on Friday and said Bankman-Fried came across as a kind of “nerdy, misunderstood business genius.”
But behind the scenes, bankruptcy filings now show FTX is shuffling money between entities — backing each one without backing, Gerard said.
“He knew he was broke. He was going there, nodding and smiling, but he knew FTX was a dead company,” Gerard told CBC.
As for celebrity endorsements, Gerard said the stars were probably well paid.
“It was a concert,” he said.
And for investors, he said, the draw was a promise that “you can get rich for free. Who doesn’t want free money?”
FTX appeared strong and solvent until November.
But a balance sheet first obtained by the Financial Times and summarized in Chapter 11 filings in the U.S. Bankruptcy Court for the District of Delaware showed that FTX had about $1 billion in cash or cryptocurrency backed by U.S. dollars — which was offset by $9 billion in the U.S. owed to customers.
Ray, the new court-appointed CEO, calls FTX’s situation “unprecedented” and says the company was controlled by “a very small group of inexperienced, unsophisticated and potentially compromised individuals.”
He calls Bankman-Fried’s continued tweets “unusual and misleading public statements.”
All of this has left the cryptocurrency industry in shock.
“The more it comes out, the more it scares us in the industry how much of a f–k cluster it is…it’s just a complete mess,” said Brian Mosoff, CEO of Toronto-based Ether Capital. .
Mosoff says this crash will leave investors scared.
“This monumental collapse of this huge and well-respected entity seemed overnight to you. Everyone is a little blindsided,” Mosoff said.
Ironically, the ad that Larry David made for FTX – in which his character is portrayed as stupid because he rejects cryptocurrencies – now seems prescient.
The two-minute spot features David as a foul-mouthed time-travelling character, expressing disdain for inventions from the bicycle to coffee to the light bulb, insisting they will never catch on. At the end of the two-minute spot, FTX refuses. Now David is being blamed for the American trust in FTX.
Celebrities face damaged reputations
Dave Pouliot, a lawyer and founder of Coinmiles in Montreal, says he’s not sure if the actors can be held liable — but says he might think twice before approving another crypto-token-based business.
“It’s their personal reputational risk that’s at stake here. I think they’re actors, they’re being paid to publicly endorse a brand. So whether they could be found civilly liable, but there’s going to be reputational damage. They’re not likely to appear in another advertising of an investment nature,” said Pouliot.
His company doesn’t take investors’ money, instead offering bitcoin discounts to users. But Pouliot says he’d like to see the industry move to regulate, build in better protections and educate.
Part of the problem with FTX was how great its founder seemed.
Bankman-Fried is a former Massachusetts Institute of Technology physics student who worked at the elite financial firm Jane Street. After founding FTX, he attracted top investors from Silicon Valley and donated millions to politicians, pushing for regulatory changes.
The cracks appeared after a rival owner of the world’s largest exchange questioned the stability of FTX.
There was a three-day panic sell-off that cost billions of FTX.
Binance boss Changpeng Zhao considered buying FTX, but backed out citing regulator concerns. But further industry regulation is futile, Mosoff said.
“You can tick as many regulatory checkboxes and paper submissions as you want [bad actors] they want to do something nefarious, they’ll find a way to do it,” he said.
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GameStop’s stock frenzy caught many people off guard, including hedge funds that were trying to cash in on the store’s demise.
Mosoff says the scandals of Mount Gox, the Tokyo-based bitcoin exchange that collapsed in 2014, and Quadriga, the exchange whose founder Gerald Cotten died mysteriously in 2018, taking the keys to $250 million worth of cryptoassets to his grave, didn’t scare him . people gone for good.
He said the FTX saga will hopefully slow the flocks of “get-rich-quick” investors attracted by bitcoin’s rise from $4,000 to a peak of $70,000 in 2020.
“People were blindly sending money here to buy these assets,” he said.
Ultimately, despite the volatility, Mosoff said he believes that when the current drama shakes out, cryptocurrencies like bitcoin and ethereum will still retain their luster.
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