Investors have sued FTX founder Sam Bankman-Fried and a host of celebrities who promoted the crypto platform, including Larry David, Tom Brady and Stephen Curry.
The proposed class action alleges that FTX was a “Ponzi scheme” that fraudulently shuffled customer funds between its affiliated entities. It accuses the company and its endorsers of promoting unregistered securities.
“Part of the scheme employed by the FTX Entities involved utilizing some of the biggest names in sports and entertainment — like these Defendants — to raise funds and drive American consumers to invest,” reads the complaint filed on Tuesday night in Florida federal court.
Other celebrities named in the complaint include Gisele Bundchen, Shaquille O’Neal and Naomi Osaka. They all appeared in ads for FTX. In one commercial, Curry repeatedly denies being cast as an expert in cryptocurrency but says “I don’t need to be. With FTX I have everything I need to buy, sell, and trade crypto safely.”
FTX and its affiliated crypto trading firm Alameda Research filed for Chapter 11 bankruptcy on Friday after failing to raise sufficient funds to stave off collapse as traders raced to withdraw billions from the exchange. In January, the company was valued at $32 billion, attracting investments from sophisticated investment firms and celebrities alike.
The Federal Trade Commission and Department of Justice are investigating FTX for potential criminal activity and securities violations, according to a report by The Wall Street Journal.
The lawsuit calls FTX’s business model a “house of cards” that targeted unsophisticated investors through celebrity endorsements. It claims the company used new funds obtained through investments in unregistered securities and loans to pay off old investments and maintain the appearance of liquidity.
Bankman-Fried’s scheme featured two main components: crypto exchange FTX and trading firm Alameda Research — both giants in their respective industries. Although they are two separate businesses, Alameda’s balance sheet was full of a cryto token issued by FTX that grants holders a discount on trading fees in its marketplace.
“While there is nothing per se untoward or wrong about that, it shows Bankman-Fried’s trading giant Alameda rests on a foundation largely made up of a coin that a sister company invented, not an independent asset like a fiat currency or another crypto,” reads the complaint. “The situation adds to evidence that the ties between FTX and Alameda are unusually close.”
The scheme fell apart when Binance CEO Changpeng Zhao obtained this information and liquidated roughly $530 million in an FTX token, claims the suit, which says that customers made a run on the exchange that the company struggled to fulfill.
More than $1 billion in client funds are missing, according to a report by Reuters.
Investors argue that FTX’s celebrity endorsers violated securities law by soliciting their investments through “misrepresentations and omissions made and broadcast around the country through the television and internet.”
According to the FTC, consumers have lost more than $80 million since October in cryto scams, due in large part to celebrity endorsements. The agency has assessed a $1.26 million penalty against Kim Kardashian for promoting crypto sold by EthereumMax without disclosing that she also received payment for the endorsement. In addition to Floyd Mayweather and Paul Pierece, she’s being sued by EthereumMax investors for misleading them.
FTX didn’t immediately respond to requests for comment.