McGuireWoods Attorneys Write About Fallout of FTX Collapse in New York Law Journal

February 26, 2024

A wave of plaintiffs’ lawsuits is cresting over the private equity firms that funded FTX, a now-bankrupt cryptocurrency exchange, after its founder’s conviction on federal fraud and money laundering crimes, McGuireWoods partner Kevin B. Frankel, associate Alex Scandroli and partner Molly White wrote in a Feb. 20, 2024, article in the New York Law Journal.

Putative class action suits, which had been stayed until the criminal proceedings concluded, allege that private equity funds provided FTX with an “air of legitimacy” that attracted customers to trade on its platform and purchase its proprietary stablecoin. Individual investors who capitalized the private equity funds that invested in FTX also are likely to file suits alleging that those funds breached their fiduciary duties, the authors added.

“Whether brought as a putative class or as individual suits, these actions pose existential threats to vulnerable investment funds that bet big on cryptocurrency,” the authors wrote. “And the anticipation of new and ongoing litigation has already had a chilling effect on investments in the cryptocurrency industry at large — an industry still reeling from mounting SEC enforcement actions, investigations by state attorneys general, and FTX’s shock to crypto traders.”

The authors recommended “private equity funds that made investments with FTX, whether directly or indirectly, prepare now to address claims or individual suits as they arise.”