The Collapse of FTX: Litigation Lessons from Recent Settlements in the R. Allen Stanford Case
March 8, 2023
On Feb. 22, 2023, Fishman Haygood, LLP and Stumphauzer Kolaya Nadler & Sloman, PLLC (SKN&S) filed a sweeping class action lawsuit on behalf of FTX customers in federal court in Miami, Fla., the former location of the collapsed company’s U.S. headquarters. The most comprehensive filing to date, the lawsuit seeks to recover damages in the form of investment losses against the banks, venture capital firms, accounting firms, and law firm that allegedly aided and abetted FTX founder Samuel Bankman-Fried and his company in a scheme to defraud customers out of billions of dollars and crypto assets. Click here to read the full complaint.
The firm’s FTX lawsuit was filed just days before court-appointed Receiver Ralph S. Janvey and the Official Stanford Investors Committee (OSIC) announced settlements of $1.345 billion with three banks accused of aiding and abetting R. Allen Stanford and Stanford International Bank, Ltd. (SIBL) in perpetrating an $8 billion fraud. In addition to the settlements reached with two other banks earlier in the year, total recoveries from the five defendant banks amount to more than $1.6 billion. Read more about Fishman Haygood’s work on behalf of investors here.
Once it began to unravel, the collapse of FTX has been swift, much like the fallout surrounding Stanford’s Ponzi scheme in 2009. However, as noted by the recent New York Times article, “TD Bank Agrees to Pay $1.2 Billion to Settle Ponzi Scheme Case,” the decades-long legal battle to recover investor losses in the Stanford case reminds us of the challenges that attorneys face in recouping the billions allegedly siphoned off by Bankman-Fried.
The lawsuit filed by Fishman Haygood and SKN&S alleges that certain banks, including Silvergate Bank and Signature Bank, aided and abetted Bankman-Fried’s fraud by providing access to the U.S. banking system. The suit goes on to allege that these banks helped launder customer funds by transferring those monies out of their accounts and into accounts that Bankman-Fried separately owned or controlled. To further assist with Bankman-Fried’s siphoning of customer funds, the suit alleges that the banks developed state-of-the-art blockchain technologies through which FTX could funnel money into Bankman-Fried’s pockets. Finally, the suit also alleges that Deltec Bank and Trust, a Bahamian bank with close ties to the former CEO, helped to fence assets from FTX accounts at Silvergate and Signature to Bankman-Fried’s accounts offshore. The lawsuit alleges that the banks not only were aware of these fraudulent transfers, but also that they facilitated them for profit.
What lessons have we learned from the recent Stanford litigation that culminated in the recent settlements?
“The defendant banks in the Stanford case had regulatory obligations to understand and monitor Allen Stanford’s suspicious activity, which provided evidence of their knowledge that he was perpetuating a fraudulent scheme through accounts at their banks,” says attorney C. Hogan Paschal, who represented investors against two bank defendants and now represents investors in the firm’s FTX lawsuit. “Despite this knowledge, the defendant banks provided high-risk services to Stanford that other banks would not, which he needed to effect the fraud. The banks’ regulatory obligations, and the steps that the banks took to satisfy those obligations, were important evidence, not as a source of an independent duty to Stanford’s victims, but to demonstrate that defendants acted with requisite scienter.”
Like the banks in the FTX case, the lawsuit alleges that venture capital firms Sequoia Capital, SoftBank Group, and Thoma Bravo; the accounting firms, Armanino, LLP and Prager Metis CPAs, LLC; and law firm Fenwick & West, LLP, benefitted financially from FTX’s fraudulent activity. For example, as a direct result of their assistance, the venture capital firms saw the value of their stakes in FTX balloon as much as 90% in a matter of months—all at the expense of individual investors, the lawsuit states.
As litigation moves forward, we can apply the same lessons learned from the cases against the banks in the Stanford matter to the other actors allegedly privy to Bankman-Fried’s wrongdoings, says Partner Kerry J. Miller, who also represents the plaintiffs in Fishman Haygood’s FTX lawsuit.
“Like the banks in the Stanford case, the venture capital firms and other defendants were positioned to see what Bankman-Fried’s victims could not, particularly since they undertook diligence to understand both FTX’s purported business model and its actual operations,” Miller explains. “That is evidence of the defendants’ knowledge. From their diligence, defendants learned of Bankman-Fried’s misconduct and yet acted in furtherance of the fraud anyway because they stood to profit handsomely for as long as the fraud continued.”
Will restitution in this case be decades in the making? It’s hard to say. There’s no crystal ball in litigation, and—despite a long road ahead—the firm is excited by the challenge of tackling the first large-scale cryptocurrency investor fraud case.