In its heyday, crypto giant FTX was so big that it attracted celebrities like tennis pro Naomi Osaka and actor Larry David to promote its brand. Now his collapse is casting a critical light on the industry – and also dragging the stars into a lawsuit.
A legal complaint filed this week in Miami accuses the now bankrupt FTX and its CEO Sam Bankman-Fried of tricking consumers into investing.
The lawsuit, which has yet to be certified, also names 12 famous “brand ambassadors” as defendants, including Osaka, David, quarterback Tom Brady, model Giselle Bündchen, basketball player Shaquille O’Neal and the Canadian businessman Kevin O’Leary.
But the celebrity-studded legal complaint is just one chapter in the saga of the collapse of the crypto exchange from Bankman-Fried, which filed for bankruptcy on Nov. 11.
The three-year-old empire – FTX, FTX.US and a trading company called Alameda Research – once valued at US$32 billion is quickly becoming another crypto cautionary tale.
Bankman-Fried swayed from regret to defiance in tweets posted from his home in the Bahamas, saying he would raise $8 billion to fix FTX, then telling a Voice reporter, “F*** Regulators [they] make everything worse.”
Details of FTX’s meteoric fall emerge in the bankruptcy process.
20) I was on the cover of every magazine, and FTX was the darling of Silicon Valley.
We have become overconfident and careless.
“Complete checks failure”
John J. Ray, the new court-appointed CEO of FTX, says he oversaw numerous corporate bankruptcies during his 40-year career, including the liquidation of Enron, but said this week “Never in my career have I seen such a complete failure of corporate controls and a complete lack of trustworthy financial information as has happened here.”
London-based crypto blogger David Gerard spoke to CBC The stream Friday and said Bankman-Fried had come across as something of a “cheesy, misunderstood business genius.”
But behind the scenes, bankruptcy filings now show FTX shuffling money between the entities — propping each up without any backing, Gerard said.
“He knew he was broke. He was walking out there nodding and smiling, but knew FTX was a dead company,” Gerard told CBC.
As for celebrity endorsements, Gerard said stars are likely well paid.
“It was a concert,” Gerard said.
And for investors, he said the raffle was the promise “you could get rich for free. Who doesn’t want free money?”
FTX appeared strong and solvent through November.
But a balance sheet obtained first by the Financial Times and summarized in Chapter 11 petitions in the US Bankruptcy Court for the District of Delaware showed that FTX had approximately $1 billion in cash or cryptocurrency backed by US dollars – which was offset by $9 billion US dollars owed to customers.
Ray, the new court-appointed CEO, calls FTX’s situation “unprecedented” and says the company was under the control of a “very small group of inexperienced, unsophisticated and potentially compromised individuals.”
He calls Bankman-Fried’s continued tweets “erratic and misleading public statements.”
All of this has left the cryptocurrency industry in shock.
“The more this is uncovered, the more those of us in the industry are in awe of how much of a cluster f— …it’s just a complete mess,” said Brian Mosoff, CEO of Ether Capital, based in Toronto.
Mosoff says this crash will leave investors fearful.
“You just have this monumental collapse of this huge, highly respected entity seemingly overnight. Everyone’s kind of caught off guard,” Mosoff said.
Ironically, the announcement Larry David filmed for FTX – in which his character is portrayed as dumb for rejecting crypto – now seems prescient.
The two-minute spot casts David as a grumpy, time-traveling character, expressing his contempt for inventions ranging from the wheel to the coffee to the light bulb, insisting they’ll never be figured out. At the end of the two-minute spot, he rejects FTX. Now David is accused of being guilty of Americans’ trust in FTX.
Celebrities face damaged reputations
Dave Pouliot, Montreal-based lawyer and founder of Coinmiles, says he’s not sure the players can be held accountable, but says they might think twice before approving another crypto token-based venture.
“Their personal reputational risk is at stake here. I think they are actors, they are paid to publicly endorse a brand. So whether or not they can be held liable from a civil point of view, but damages to reputation will be caused. They are not likely to appear in any other investment-related advertising,” Pouliot said.
His company does not take money from investors, instead offering bitcoin rebates to users. But Pouliot says he would like to see the industry move to regulate itself, incorporating better protections and better education.
Part of the problem with FTX was the quality of its founder.
Bankman-Fried is a former Massachusetts Institute of Technology physics student who had worked at Jane Street, an elite financial firm. After founding FTX, he attracted top Silcon Valley investors and donated millions to politicians, pushing for regulatory change.
It was after the rival owner of the world’s largest exchange questioned the stability of FTX that cracks appeared.
There was a three-day panic sell that cost billions of FTX.
Binance head Changpeng Zhao considered buying FTX, but quickly backtracked, citing concerns from regulators. But further industry regulation is futile, says Mosoff.
“You can tick as many regulatory boxes and paper documents as you want. If [bad actors] want to do something nefarious, they’ll find a way to do it,” Mosoff said.
Mosoff says the Mount Gox scandal – a Tokyo-based bitcoin exchange that imploded in 2014 – and Quadriga – the exchange whose founder Gerald Cotten mysteriously died in 2018 taking away the keys to $250 million in crypto assets in the grave – didn’t scare people away for good.
He said the FTX saga will hopefully slow down the herds of “get-rich-quick” investors drawn to Bitcoin’s rise from $4,000 to $70,000 in 2020.
“People were blindly sending money to buy these assets,” he said.
Ultimately, despite the volatility, Mosoff believes that when all the current drama breaks out, cryptocurrencies like bitcoin and ethereum will still retain their shine.