Many customers lost billions of dollars in the recent collapse of cryptocurrency exchange FTX.
FTX, along with Alemeida Research and 130 affiliate companies filed for Chapter 11 bankruptcy protection in the United States on November 11, 2022. One of those investors was the Ontario Teachers’ Pension Plan which invested US$ 95 million and will be writing down their investment to zero at the year end.
So what are the options for customers to recover some of their losses? Basically there are three options for investors who lost money. This is not an exhaustive list but a brief summary of how to make the best of a catastrophic situation.
1) File a claim in the bankruptcy proceedings
As unsecured creditors, customers are unlikely to recover much, if any of their money, once the secured and other creditors are paid out from any assets of FTX that can be found. However, if customers who lost their money are able to convince the bankruptcy court that their money is not property of FTX but belongs to the customers, then those customers will be able to get paid in priority over other secured or unsecured creditors, if the money is able to be traced as to where it went.
2) Join a class action lawsuit against FTX, its former CEO Sam Bankman-Fried (“SBF”) and other executives, and against individuals who promoted FTX
Generally when a company files for bankruptcy protection, the bankruptcy stays any other civil proceedings except in a limited number of situations. One of those exceptions is where the money in dispute does not belong to the bankrupt but belongs to, or is held in trust for someone else – in this case the customers of FTX. Another exception is where there has been fraud. A judgement for fraud survives bankruptcy. Last week two former executives of FTX pleaded guilty to fraud charges and FTX’s former CEO, Sam Bankman-Fried has been charged with 8 criminal charges in what a prosecutor described as ” fraud of epic proportions”.
So far, I’ve counted 7 lawsuits seeking class actions status filed in the US in various states. The most recent one was filed this past Tuesday, December 27, 2022, in the US Bankruptcy Court in Delaware. That suit is seeking a declaration, among other things, that the money did not belong to FTX and does not form part of the estate in bankruptcy, but instead belongs to the customers.
Celebrities who were paid to promote FTX do not get protection in the FTX bankruptcies and can be sued outside of the bankruptcy. This incudes Shark Tank celebrity Kevin O’leary. Similarly,individual executives, including SBF can be sued personally.
3) Claim the losses on your income tax return
If you were in the business of trading cryptocurrency, a reasonable argument can be made that you should be entitled under the Canadian Income Tax Act to deduct your FTX losses from your profits, or alternatively deduct your losses from any capital gains. Whether cryptocurrency investments fall into the category of business income / losses or capital gains / capital losses is the subject of another blog post I wrote a few months ago.
It is unlikely that there will be any fast recovery for investors who lost their money in the FTX collapse. This is a highly complex case, involving multiple jurisdictions, with investors from many countries that will take years to resolve.
I am not aware of a class action suit having been commenced in Canada, but I would be interested in starting one on behalf of Canadian investors who lost money if there is enough interest.