The U.S. Bankruptcy Code offers many protections for individuals and businesses in debt. Some laws freeze claims against debtors in bankruptcy. But that doesn’t mean someone can’t recover losses from an entity. Recently, customers of the failed cryptocurrency company, FTX, filed class-action lawsuits (at least six as of early January 2023 according to Bloomberg Law). So, what is the path a bankruptcy attorney in Orange County can take to recover losses in this type of situation?
A Clever Legal Approach
In the case of the FTX class actions, litigators are going after the enablers. That’s because laws that freeze claims when a debtor files for bankruptcy don’t apply to third parties. One suit claims that unregistered securities were being promoted; these were yield-bearing accounts from FTX that pay interest on crypto holdings.
According to University of Michigan law school professor Adam Pritchard, as quoted in a Bloomberg story, it’s up to a judge to rule the accounts in question were securities that someone can profit from. In November 2022 FTX and its affiliates filed for bankruptcy. Customer withdrawals had already been halted due to a liquidity crisis, so recovering funds from FTX became impossible.
Celebrity Endorsers in the Crosshairs
Since plaintiffs cannot go after FTX directly amid its bankruptcy filing, they are suing third parties. Namely, the individuals who promoted what a Florida lawsuit alleges was an illegal product. These include the NFL’s Tom Brady, comedian Larry David, and accounting firm Prager Metis as well as entrepreneur and FTX CEO Sam Bankman-Fried as an individual. Legal experts have said similar actions were successful in the past, particularly following the collapses of WorldCom and Enron in the wake of high-profile fraud revelations. Underwriters, banks, and other parties paid out billions of dollars in class-action settlements in those cases.
History Repeats Itself
In the wake of the FTX failure, several California law firms have targeted the bank Silvergate. They claim it should be liable for aiding fraud. At least one suit alleges FTX customer assets were improperly intermingled with Alameda Research, a trading firm, and that Silvergate was aware of this, according to sources familiar with the case. Meanwhile, Bankman-Fried faces eight criminal counts, including wire fraud, to which he pleaded not guilty in January. Charges allege he misused billions of dollars in customer funds.
How Does Such a Case Work?
Class action lawsuits notoriously face difficult challenges. To complicate matters, the FTX lawsuits involve the Department of Justice; its level of involvement can impact the speed at which the lawsuits will move along. There’s also the strength of each claim to consider. For example, third parties can argue that investors didn’t rely on auditors to make decisions or work with FTX (that could free them of liability if those arguments are proven). There is also uncertainty as to how current laws apply to cryptocurrency.
Speak to a Bankruptcy Attorney in Orange County Today
OakTree Law is a team of bankruptcy and foreclosure attorneys serving clients in the Los Angeles area. We provide customized solutions for those facing large amounts of debt and aggressive collections actions. Our business and civil litigation professionals can help resolve disputes without going to trial. Regardless of the complexity of your case, we will work to fully understand your legal situation, educate you about your rights and laws pertaining to your legal matters, and pursue a suitable resolution. To get started, request a free case evaluation or call 888-348-2609 today.