Turbulence marked 2022 for the nascent cryptocurrency industry when major exchanges, digital currencies, and lenders collapsed, causing billions of invested funds to vanish overnight. Using Docket Alarm analytics, this article examines the legal implications for several firms who met their demise last year, including the infamous crypto exchange FTX, crypto lenders Celsius Network and BlockFi, and the platform behind the digital currencies TerraUSD and Luna, Terraform Labs.
In addition to bankruptcy proceedings and civil and criminal suits filed by regulators, investors sued the troubled companies and sometimes their leaders. Docket Alarm analytics reveal trends in timing, venue selection, and causes of action for state and federal cases.
FTX and Sam Bankman-Fried
Last year crypto’s collapse cannot be spoken about without mentioning FTX, an exchange spearheaded by Sam Bankman-Fried, colloquially known as “SBF,”a young entrepreneur who enjoyed considerable fame prior to FTX’s implosion and subsequent bankruptcy in November 2022.
While Law Street Media’s John A. Jenkins covered both FTX-related Freedom of Information Act requests and lawsuits, a look at litigation directed at FTX’s notorious founder in the last 12 months shows that most litigants have blamed Bankman-Fried for fraud. Currently ongoing criminal actions by the Securities and Exchange Commission and the United States Attorney’s Office accuse him of various federal crimes including wire fraud and conspiracy to commit securities and commodities fraud, money laundering, and violate campaign finance laws.
In addition to Bankman-Fried, classes of FTX customers have sought to hold other FTX insiders and a dozen or so “brand ambassadors,” celebrities who allegedly endorsed and promoted FTX products unscrupulously, accountable. For instance, one suit filed in Miami, Fl. listed Tom Brady, Gisele Bundchen, Stephen Curry, the Golden State Warriors, and Shaquille O’Neal as defendants, the latter of whom is evading service according to a recent filing.
The case is far from isolated as the Judicial Panel on Multidistrict Litigation is currently considering which cases to include in the MDL styled In Re: FTX Collapse Litigation and where to send them.
Like FTX, Celsius Network was also led by a crypto entrepreneur, Alex Mashinsky. After the crypto lender went belly-up in July 2022, regulators like the New York Attorney General sought Mashinsky for fraud and specifically for duping investors into believing that Celsius was stable and encouraging them to deposit billions in digital assets.
The voluntary Chapter 11 proceeding filed in the Southern District of New York by counsel Kirkland & Ellis LLP listed the top fifty creditors, including some who held eight figure sums of money with the Hoboken, New Jersey-based platform. Lawsuits spiked in July 2022, when nearly two dozen were filed.
Behind SDNY, small claims cases in state courts including California and Illinois defined litigation directed at Celsius in the wake of its collapse.
Another crypto lender, BlockFi, succumbed to bankruptcy in November 2022. BlockFi’s downfall was partly tied to FTX as it relied upon a $400 million “credit facility” to stay above water after competitors Celsius and Voyager Digital collapsed earlier in the year, according to The Economic Times.
In addition to bankruptcy proceedings, the company found itself in hot water with regulators over its BlockFi Interest Accounts (BIAs), which state and federal regulators said were securities and unregistered ones at that.
Law enforcement opted to bring the charges administratively, ending with a $100 million fine for violating the registration provisions of the Investment Company Act of 1940, a first-of-its-kind claim, and parallel state laws, as discussed in Law Street Media’s Emerging Litigation Podcast. In that proceeding, Sullivan & Cromwell took the helm defending BlockFi.
Dovetailing on the regulators’ suit was one brought by investors, who argued that they suffered damages as a direct result of BlockFi’s failing to register BIAs with the relevant regulators, though their pursuit ended due to BlockFi’s bankruptcy.
Voluntary Chapter 11 bankruptcy proceedings were spearheaded by Haynes and Boone LLP with Kirkland & Ellis also listed as counsel. Aside from bankruptcy-related proceedings and private registration-related litigation, Docket Alarm data shows that BlockFi faced state court lawsuits from individual claimants.
Terraform Labs and Founder Do Kwon
Terraform Labs Pte. Ltd. (TFL) and its leader, Korean national Do Kwon, have come under fire for the May 2022 collapse of TFL’s popular U.S. dollar-pegged stablecoin, costing investors $40 billion.
TFL’s LUNA token and Terra USD (UST), had a market value among the ten highest crypto assets in the world in April 2022. Yet the following month, due to “structural infirmities,” the Terra ecosystem exposed a crack in UST’s ability to maintain its dollar peg, unraveling the UST/LUNA pair and the underlying protocol.
Within a week, the price of UST and LUNA cratered by more than 90%, resulting in “devastating losses for U.S. retail and institutional investors,” the SEC’s recently-filed complaint said. The lawsuit further noted that press reports indicate that a Korean court issued an arrest warrant for Kwon.
Like the Northern District of California class action brought by Terra token owners and led by The Rosen Law Firm P.A., the SEC alleges a handful of securities fraud and registration-related causes of action.