Silicon Valley is struggling for legal action from FTX | Media Pyro

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On Friday, FTX filed for bankruptcy as former CEO Sam Bankman-Fried resigned and was replaced by John J. Ray III, the lawyer who oversaw Enron’s liquidation. The bankruptcy proceedings promise to be a disturbing one, judging how FTX spends clients’ money and trying to unravel conflicts of interest among its 134 affiliated companies.

“It’s going to be difficult with a lot of connected companies, a lot of debt, a lot of customers, and jurisdictions in different countries,” said Reena Aggarwal, director of Georgetown University’s McDonough Psaros Center for Financial Markets and Policies. “This is a multitude of issues.”

A lot of finger-pointing at the VCs who rushed to throw money at Sam Bankman-Fried, did little or didn’t do the right thing along the way. “If you’re making a small amount of money, you’re probably not going to do the right level of work if you believe in the founder and you think this is a hot business. We’ve seen this in many contexts. [in venture capital],” said Lee Reiner, a professor of FinTech Law and Policy at Duke Law School.

And to be clear, crypto hasn’t been known for much scrutiny and attention to detail. Kevin May, the founder of the leading crypto trading group Floating Point, explained that the VCs have increased the reliability of FTX, but said that playing fast and convenient is part of investing in digital assets, when enjoy the bull market period at the end of 2021 and the beginning. 2022. “Everything in crypto is moving fast,” he said. “It’s hard to blame VCs for playing the game created by crypto,” he explained, referring to how quickly platforms like FTX raised money last year as valuations rose. If VCs are not involved in the financing process within a few days, they risk being left behind. Due to the fact that crypto companies have many financial accounts in the world, tracking the flow of assets is not easy compared to the method of checking the financial health of a standard technology company, as example.

So what is the legal drift?

Few think that FTX’s VC backers are at risk of being sued by small partners, which is rare in Silicon Valley. Commitments LPs often sign to bind a VC partner if the investment results are negative. “For the Sequoias of the world, their LPs aren’t mom-and-pop traders, they’re big corporate investors who are sanctioned, high-net-worth individuals,” Aggarwal explained. “In larger projects for them, there is little investment.”

Legal experts I spoke with think that pension plans invested in FTX—like the Ontario Teachers’ Pension Plan—may be in a tough spot. “Even if you’re a sponsor, they have a legal obligation to manage plan assets to maximize benefits for beneficiaries,” Reiner said. “And they are facing legal responsibility.” The Ontario Teachers’ Pension Plan is funded through its employment wing, the Teacher Employment Fund. “While there is uncertainty about the future of FTX, any losses on this investment will have a minimal impact on the Plan, as this investment represents less than 0.05% of our total net assets,” the statement said. OTPP in a statement issued on Thursday. Aggarwal explained that since OTPP is a small investment, it may not have a significant impact on an individual’s pension.

A recent case study in the crypto case law after the explosion was the bankruptcy proceedings for the Celsius platform that had failed. One thing to watch? The competition between investors, creditors, and shareholders is to choose who is the first to pay when the bank goes bankrupt. In the Celsius case, customers and shareholders are arguing with each other to see who comes first. March and FTX explained that there are likely to be many lawsuits as financial advisers, mostly hedge funds and brokers, strategize the best way for the law to be obtained. something back.

Aggarwal explained that the trial is not only about FTX itself but also against individuals because the extent of the culpability of Bankman-Fried and its inner circle is in court. “I’m sure there will be class action lawsuits here,” he said. However, even if there is a consumer case, it is not clear what assets will be used to pay the jury (Celsius is still involved in several pending lawsuits).

About SBF again? It’s unclear at this time if he will be sent to prison for his role in the FTX scandal, Fortune’s Jeff John Roberts reports. Problems such as FTX’s headquarters in the Bahamas and the lack of clarity about SBF’s intentions could create problems for the prosecution. However, Jeff said, “However, a long-time crypto lawyer told Fortune that he has no doubt that SBF’s behavior and FTX’s business practices clearly showed fraud. The lawyer, speaking about the lack of name, pointed to evidence such as FTX’s arrangements and company disclosures and SBF’s statements. If convicted of wire fraud, he could be sentenced to up to 20 years in prison.

Finally, my colleague Luisa Beltran published a closer look at SBF’s flagship investment fund Alameda Research, including what we know about its 20-something CEO, Caroline Ellison. You can read the full story here.

Lucy Brewster
Twitter: @lucyrbrewster
Email: [email protected]
Submit an assignment for Word Paper reading here.

Jackson Fordyce hosted the episode for today’s post.

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