FTX Fallout Hits BlockFi, Tom Brady, Kevin O’Leary and Many More

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The FTX debacle is just at its nascent stages, yet troubles keep on piling up; while the untangling of the bankruptcy proceedings might take a while, the damage is spreading fast.

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Amid conspiracy theories, angry investors, former CEO Sam Bankman-Fried’s incessant and cryptic tweeting, and accumulating lawsuits that now include celebrities such as Tom Brady and Kevin O’Leary, it’s hard to keep up with what seems like the biggest catastrophe in recent financial history.

Here’s what we know so far.

‘Complete Failure of Corporate Controls’

FTX, one of the largest cryptocurrency exchanges, and its more than 130 subsidiaries filed for Chapter 11 on Nov. 14.

On Nov. 17, John Ray, the newly appointed CEO of FTX, said in a filing to the U.S. Bankruptcy Court for the District of Delaware: “Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here. From compromised systems integrity and faulty regulatory oversight abroad, to the concentration of control in the hands of a very small group of inexperienced, unsophisticated and potentially compromised individuals, this situation is unprecedented.”

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It’s worth noting that Ray has more than 40 years of legal and restructuring experience and has been the chief restructuring officer or CEO in several of the largest corporate failures in history, including that of Enron.  

“Mr. Bankman-Fried often communicated by using applications that were set to auto-delete after a short period of time, and [he] encouraged employees to do the same,” the new filing notes.

Ray added, “Mr. Bankman-Fried, currently in the Bahamas, continues to make erratic and misleading public statements. Mr. Bankman-Fried, whose connections and financial holdings in the Bahamas remain unclear to me, recently stated to a reporter on Twitter that [regulators] ‘make everything worse’ and suggested the next step for him was to ‘win a jurisdictional battle vs. Delaware.'”

Ray also said he does not have confidence in the information in the FTX balance sheet as it “was produced while the debtors were controlled by Mr. Bankman-Fried” and “the information therein may not be correct as of the date stated.”

Contagion Fears Abound

Already, rival platforms such as Crypto.com, which mistakenly sent $400 million to the wrong wallet on Nov. 13, have had to assuage edgy investors.

BlockFi, which was bailed out earlier this year by FTX, is now reportedly looking at filing for bankruptcy and has halted withdrawals.

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“BlockFi, the lender roiled by the Luna/Terra collapse earlier in the year, was a creditor to Alameda Research [another Bankman-Fried company],” said Hayden Hughes, co-founder and CEO of Alpha Impact. “Rather than face margin calls of its own, FTX bailed the firm out in what appears to have been an attempt to gain new user deposits. FTX had offered a $250 million revolving line of credit. Now that FTX is bankrupt, the line of credit and the customer deposits are gone, causing a possible bankruptcy at BlockFi.”

BlockFi did not respond to requests for comment.

In February, the Securities and Exchange Commission (SEC) charged Peter Thiel-backed BlockFi with failing to register the offers and sales of its retail crypto lending product, and the company agreed to pay a $50 million federal penalty and an additional $50 million in fines to 32 states to settle similar charges.

On Nov. 16, Genesis Global announced it was halting withdrawals at its lending business, due to the “unprecedented market turmoil” FTX has created. In turn, Gemini’s yield program, Gemini Earn, also announced it will not be able to meet customer redemptions within the service-level agreement of five business days. Gemini was founded by the Winklevoss brothers.

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Following the announcement, Crypto.com CEO Kris Marszalek tweeted Nov. 16: “Crypto.com has zero exposure to Genesis and Gemini Earn.”

“Over the course of the coming weeks and months, we are going to be seeing more companies with exposures to FTX likely fold up, a trend that is significantly going to be impacting the industry sentiment and price of Bitcoin negatively,” said Dmitry Ivanov, head of marketing and PR at CoinsPaid. “The coin has lost 7.86% over the past week amid the entire FTX saga and is currently changing hands at $16,765.61; and, if the situation deteriorates, the coin can drop to the $13,500 to $14,000 range in the short term.”

Tom Brady, Other Celebs Sued

FTX is taking several celebrities who had endorsed the firm down with it. On Nov. 15, plaintiff Edwin Garrison filed a class action lawsuit against Bankman-Fried, Tom Brady, Gisele Bundchen, Stephen Curry, the Golden State Warriors, Shaquille O’Neal, Udonis Haslem, David Ortiz, Trevor Lawrence, Shohei Ohtani, Naomi Osaka, Larry David and Kevin O’Leary. The lawsuit called them “all parties who either controlled, promoted, assisted in, and actively participated in FTX Trading LTD and West Realm Shires Services Inc.”

“The deceptive and failed FTX Platform was based upon false representations and deceptive conduct,” according to the filing. “As a result, American consumers collectively sustained over $11 billion in damages.”

O’Leary tweeted on Nov. 12: “As an investor, you will never get it right every time. You will make some mistakes. Sometimes big ones like FTX. The key is to learn from them so you don’t repeat. Over time, experience will get you to a place where you make more good investments than bad. #Crypto bottom is in!”

FTX Loses Naming Rights to Arena

FTX Arena is looking for a new naming partner. In July 2021, the company struck a 19-year, $135 million deal with Bankman-Fried to rename the Miami Heat’s stadium FTX Arena.

Miami-Dade County and the Heat released a statement saying, “Reports about FTX and its affiliates are extremely disappointing. Miami-Dade County and the Miami Heat are immediately taking action to terminate our business relationships with FTX, and we will be working together to find a new naming rights partner for the arena.”

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About the Author

Yaël Bizouati-Kennedy is a full-time financial journalist and has written for several publications, including Dow Jones, The Financial Times Group, Bloomberg and Business Insider. She also worked as a vice president/senior content writer for major NYC-based financial companies, including New York Life and MSCI. Yaël is now freelancing and most recently, she co-authored  the book “Blockchain for Medical Research: Accelerating Trust in Healthcare,” with Dr. Sean Manion. (CRC Press, April 2020) She holds two master’s degrees, including one in Journalism from New York University and one in Russian Studies from Université Toulouse-Jean Jaurès, France.
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