Credit: Maxim Hopman | Unsplash
For those who don’t know, FTX was a cryptocurrency exchange founded in May of 2019 and became one of the largest in size within the following year. After it saw a quick rise to popularity, FTX was up for acquisition by Binance, which is still the world’s largest crypto exchange. Binance CEO, Changpeng Zhao, voiced his concern about the stability of FTX and got rid of his own stake in the exchange causing mass fear about the exchange’s future and drove down the price of the FTT, FTX’s utility token component. This concern was the catalyst for FTX’s fall from grace.
While FTX was in its rapid decline, Binance announced a plan to acquire FTX, then refused to enter a bailout agreement as FTX sank further, completely abandoning the effort days after its initial announcement. In November, FTX began a Chapter 11 bankruptcy case, which allows for a corporation or partnership to reorganize itself, plan for its creditors to be repaid, and ultimately, keep the business alive.
The speed of FTX’s rise to prevalence was no mistake. FTX strategically targeted entities and individuals with large social media followings and influence. Creators Agency LLC, founded by eight YouTubers, is a talent management agency for over 50+ digital creators with over 35+ Million YouTube Subscribers. The business strategy of Creators Agency LLC was to help content creators and businesses scale their audience and brand awareness. Creators Agency LLC had a purposeful strategy in offering celebrities, with substantial social media influence, promotional deals to help companies go viral.
Since the fall of FTX, Creators Agency LLC and its founders have been named as respondents in multiple class action lawsuits for their hand in the promotion of the cryptocurrency exchange. The suit claims the petitioners suffered damages through purchasing unregistered securities with yield bearing accounts and FTX performed pump-and-dump practices for the financial benefit of themselves. FTX is a now defunct trading platform that conducted fraud. In an effort to consolidate similar actions, the petitioners have claimed, “FTX’s business practices were conducted in Miami, FL, and the related individuals and entities who promoted the platform and the unregistered securities it offered and sold, and the fraudulent and misleading activities they conducted were based in Miami.”
In order for the judicial panel to “consolidate the related actions of the class” pursuant to 28 U.S.C. § 1407, the petitioners must satisfy three elements:
the cases “involve common questions of fact”
consolidation will further “the convenience of parties and witnesses;”
consolidation will promote the “just and efficient conduct of the actions.”
First, elements 2 and 3 are sufficed because due to the numerous petitioners in the class, consolidation of the related actions of the class will remove redundant discovery proceedings, thwart inconsistent pretrial rulings, and conserve the time and resources of parties and witnesses. Consolidation provides the just and efficient conduct of litigation.
Second, element 1 is sufficed because petitioners’ cases share similar facts and issues that took place in the court’s jurisdiction and are central to the litigation. Therefore, the related actions should be consolidated to the Southern District of Florida.
Influencers and their agents aren’t the only ones being sued; the Securities and Exchange Commission has been identifying and charging celebrities for their promotion of the cryptocurrency exchange, too. These celebrities include actress Lindsay Lohan, influencer and boxer Jake Paul, rapper Soulja Boy, and musicians Lil Yachty, Neyo, Austin Mahone, and Akon. These celebrities are being charged for unlawfully endorsing crypto investments without disclosing that they were compensated for their endorsements.
The primary purposes of the Securities and Exchange Commission is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation which they do by enforcing the laws against stock manipulation when necessary. Hundreds of investigations are done each year by the SEC in order to hold accountable those who violated the federal securities laws. Violations may include information misrepresentation regarding potential investments, market price manipulation, stealing, insider trading, etc. However, SEC investigations are civil. Thus, individuals and entities can be charged substantial amounts for violating federal securities laws and sought for remedies, but cannot be imprisoned by the SEC. That being said, potential criminal cases may be referred to criminal law enforcement authorities and SEC investigations may be coordinated to be done along with criminal investigations.
After a quick 15 minutes of fame, FTX and its promoters find themselves open to seemingly endless civil and possibly criminal liability.
*The views expressed in this article do not represent the views of Santa Clara University.