VOT Research Desk
Market Analytics and Considerations
On Friday, former CEO Sam Bankman-Fried resigned and was succeeded by John J. Ray III, an attorney who oversaw Enron’s liquidation. The bankruptcy proceedings look like they will be complicated because they will have to fight over how FTX spent money from customers and try to find conflicts of interest among its 134 affiliated businesses.
With so many related businesses, so many creditors, so many clients, and the several international jurisdictions, it will be difficult. There are several problems in this.. Already, many people have pointed the finger at the venture capitalists who rushed to invest in Sam Bankman-Fried without conducting any research.
If you believe in the founder and think this is a hot industry, you may not conduct the level of due diligence you should if you are only making a minority investment. Lee Reiner, a Duke School of Law professor of FinTech Law and Policy, stated, “We’ve seen this in a number of contexts [in venture capital].”
To state the obvious, crypto has never exactly been known for strict fundamental focus and rigorous scrutiny. Kevin March, the founder of the cryptocurrency prime brokerage platform Floating Point group, said that venture capitalists overestimated the credibility of FTX. However, March also said that playing it loose is part of investing in digital assets, particularly during the bull market in late 2021 and early 2022.He stated, “Everything in crypto moves so quickly.” He explained, referring to how quickly platforms like FTX raised cash last year when valuations were skyrocketing,
“It’s hard to fault the VCs for playing the game that crypto has invented.” VCs ran the risk of being left behind if they did not jump into funding deals within days. When compared to the due diligence process used to examine the financial health of a typical technology company, for instance, it is more difficult for crypto firms to track the flow of assets because they frequently have a large number of international bank accounts.
What will the legal consequences be then?
In Silicon Valley, few people believe that FTX’s VC backers could be sued by limited partners, which is uncommon. A VC partner’s liability is frequently limited by agreements signed by LPs in the event of disappointing investment returns. For the Sequoias of the World, their LPs are not retail mom-and-pop investors; rather, they are accredited, large institutional investors with high net worth individuals. This was a small investment for them in the grand scheme of things.
The pension plans that invested in FTX, such as the Ontario Teacher’s Pension Plan, may be in a more difficult situation, according to the legal professionals I spoke with. Reiner elaborated, Certainly, if you are a fiduciary, they have a legal obligation to manage plan assets in a manner that maximizes benefits for the beneficiaries. Then, at that point, they are confronting possibly legitimate risk. The Teacher’s Venture Fund, the Ontario Teacher\s Pension Plan’s venture arm, made investments. Given that this investment represents less than 0.05% of our total net assets, any financial loss on this investment will have limited impact on the Plan, even though the future of FTX is uncertain.
The bankruptcy proceedings for the defunct platform Celsius are a recent example of post-blowup crypto case law. A thing to look out for? the competition among shareholders, creditors, and depositors to determine who will be paid first during the bankruptcy process. Customers and shareholders are currently competing with one another in the Celsius case to see who comes first. March explained that as depositors, many of whom are hedge funds and retail investors, plan the best legal strategy to get their money back, FTX is likely to be the subject of numerous lawsuits.
As the extent of Bankman-Fried’s and his circle’s guilt is revealed in court, there will likely be lawsuits against individuals as well as FTX itself. We are sure there will be class action lawsuits here. However, even when customers have a case, it is unclear which assets are available to pay litigants (Celsius is still undergoing a slew of unresolved lawsuits).
What about SBF himself ?
According to Jeff John Roberts of Fortune, it is currently unknown whether his involvement in the implosion of FTX will result in his imprisonment. Prosecution may encounter difficulties as a result of complications like SBF’s unclear intent and FTX’s Bahamas headquarters.
On the other hand, Jeff noted that “a seasoned cryptocurrency attorney told Fortune he has no doubt that SBF’s conduct and FTX’s business operations definitely proved corruption.” Under the requested anonymity, the attorney highlighted documentation from FTX’s terms of service, investor presentations, and public statements by SBF. If he is actually convicted of grand larceny, he faces charges term of 20 years in jail.
