By Jeff Birren, Senior Writer
The Warriors and FTX “launched a partnership in 2022” that put FTX’s logo on the court at Chase Center, the Warriors’ arena. FTX subsequently “imploded” in November 2022. Not only did the Warriors lose a sponsor, but the team has been sued in a class action case, only by people living outside of the United States, because of that sponsor’s failure (Elliott Lam, individually and on behalf of others similarly situated v. Sam Bankman-Fried, Caroline Ellison, and Golden State Warriors, LLC, Case No. 3:22-cv-07336, U.S.D.C. N.D. Cal., (“Complaint”), (11-21-22)).
Background
According to the Complaint, “FTX Trading LTD and West Realm Shires Services Inc. d/b/a FTX US’s” was “collectively valued at over $32 billion” and “was known for offering and selling unregistered securities in the form of yield-bearing accounts (‘YBAs’) to residents of the United States and other countries” (Id. at 2). FTX provided a platform on a mobile application that “allowed users to place cryptocurrency trade orders” and use “interest bearing or yield bearing accounts” (Id. at 8).
FTX advertised in sports-related activities. It “bought the naming rights” for the NBA’s Miami Heat’s facility, “signing a 19-year deal with the team and Miami-Dade County, Florida for $135 million” (Id. at 4). It also had a contract with the “Mercedes-AMG Petronas Formula 1 team.” FTX became the title sponsor of Major League Baseball’s Home Run Derby X and signed a deal with the Champions Chess Tour 2022. It “ran Super Bowl ads” and bought the naming rights for the University of California Berkeley’s stadium.
FTX entered into an agreement with the Warriors in early 2022. FTX’s logo was put on “the main court at “Chase Center, the GSW’s new 1.4 billion arena. FTX served as GSW’s Official Cryptocurrency Platform and NBA Marketplace, and to further promote FTX to its fanbase, the GSW dropped NFT’s (nonfungible tokens) on FTX US beginning in early 2022” (Id. at 13). It was the Warriors’ “first international rights partner” and included the Warriors’ “G League affiliate team (Santa Cruz Warriors), the Golden Guardians and Warriors Gaming Squad (affiliated e-sports teams), including arena signage at Chase Center, and virtual floor signage at GSW games.” For a short period of time, all seemed well, but it was not to last.
In early November 2022, the “FTX Entities imploded” and “filed for bankruptcy in the aftermath of a seemingly massive and nearly unprecedented liquidity crisis” (Id. at 2). The CEO resigned and was replaced by John Ray III. Ray later produced a report that said that FTX had issued a “$1 billion” loan to the former CEO (Id. at 3).
The class is represented by three law firms. One is in San Francisco, another is in Rutherford, California, and the third is in Hong Kong. The single named plaintiff, Elliott Lam, is a
citizen of Canada, but a resident of Hong Kong. Defendant Sam Bankman-Fried is the former FTX CEO and lives in the Bahamas. Ironically, both of his parents are Stanford University law professors, but neither one will now be teaching there in 2023. Bankman-Fried recently claimed that he is now “down to his last $100,000” (“Sam Bankman-Fried says he ‘miscounted’ $8 billion”, Yahoo News (12-2-22)). He also said the company had “no accounting department” and “double-counted $8 billion.”
Defendant Caroline Ellison was the CEO of Alameda Research LLC, a trading company “launched” by Bankman-Fried (Complaint at 5). Ellison became the sole CEO of Alameda in August 2022 until November 2022 when Alameda filed for bankruptcy, and she was terminated. Ellison, like Lam, lives in Hong Kong. The final defendant is the Warriors, the only party connected to California.
Jurisdiction and Venue
The Complaint asserts that California federal court has jurisdiction “because this is a class action for a sum exceeding $5,000,000.00,” and “at least one class member is a citizen of a state different than the Defendants.” The Court “has personal jurisdiction…because at least one Defendant conducts business in California.” Venue is proper “because Defendants engaged in business in this District; a substantial part of the events or omissions giving rise to the claims at issue occurred in this District; and because Defendants entered into transactions and/or received substantial profits from those who reside in this District” (Id. at 6). Alternatively, venue is proper “as there is no single district in which all Defendants reside; because a substantial part of the events or omissions giving rise to the claims at issue occurred outside of the United States in the Bahamas” and the Warriors are “headquartered and conduct business in this District.”
Factual Allegations
The Complaint states that Bankman-Fried co-founded FTX in May 2019, “the owner and operator of FTX.COM cryptocurrency exchange.” In July 2021, “the darling startup” “reached an astronomical valuation of $18 billion due to raising $900 million during a funding round.” By October “the value of FTX had soared again to $25 billion” based in part on “an infusion of $420 millions from reputable investor institutions” (Id. at 7).
FTX’s “primary product was a platform service provider that served as a mobile application for cryptocurrency investment and allowed users to place cryptocurrency trade orders on behalf of users like Plaintiff and Class and to use interest bearing or yield-bearing accounts.” In 2022, “around $15 billion in assets were traded daily on the platform, which represented 10% of global volume for crypto trading. This made FTX one of the largest crypto-trading companies in the world.” FTX had its “primary international headquarters in the Bahamas” but “maintained a US base of operations in Miami.” By November 2022 “customers had entrusted a purported $10 to $50 billion dollars to the platform” (Id. at 8). Bankman-Fried profited from the growth that provided “him with an income of more than $1 billion in 2022.” He allegedly “reached a net worth of $26 billion.” Then came the fall of the House of FTX.
In August 2022, “a U.S. bank regulator ordered FTX to halt ‘false and misleading’ information about whether funds at the company were insured by the government (they were not).” In early November “a popular crypto news publication CoinDesk released a devastating report, with leaked financial documents.” FTX then “saw a staggering $6 billion in withdrawals over 3 days.” On November 11, 2022, FTX “filed for Chapter 11 bankruptcy and Bankman-Fried resigned as CEO” (Id. at 9).
Allegedly, earlier in the year, “Bankman-Fried secretly transferred at least $4 billion in customer funds to Alameda to apparently cover for Alameda after it faced a series of losses.” Bankman-Fried owned 90% of Alameda, but told an interviewer that he could not explain what happened to the missing billions of dollars (A. Osipovich, Wall Street Journal, (12-5-22)). The “FTX entities lent” Alameda “as much as $8 billion, of which more than half belongs to customers” (Complaint at 10). Alameda “suffered significant losses” and that “led to FTX loaning” it “more than half of its customer funds.” Bankman-Fried admitted “that he made a poor judgment call.” According to estimates, the FTX Entities “apparently lent billions to a company that Defendant Bankman-Fried also owned in the past year. This misconduct and mismanagement raises significant ethical, legal and conflicts of interest problems for Defendants” (Id. at 11).
This is a sports-related publication, so it has abbreviated many of the factual and legal allegations.
Class Allegations
The class includes all “persons or entities outside the United States who, within the applicable time period limitations, purchased or enrolled in (‘YBAs’) offered by” the defendants (Id. at 13). It is “comprised of thousands, if not millions, of consumers internationally, to whom FTX offered and/or sold YBAs” (Id. at 14). Common “questions of fact and fact predominate over any questions affecting individual class members” including “whether the YBAs were unregistered securities under federal or applicable law” (Id. at 15).
The Complaint has over two pages of class action law prior to stating the five causes of action. All five are California state law claims. The first is a purported violation of California’s Unfair Competition Law, Cal. Bus. & Prof. Code §17200 et seq. The second is an alleged violation of California’s False Advertising Law, Cal. Bus. & Prof. Code §17500 et seq. The third is a claim for “Fraudulent Concealment.” The fourth is for “Civil Conspiracy” and the fifth is for “Declaratory Judgment, Cal. Code Civ. Proc. §1060.”
A Sports Case
The factual allegations concerning the Warriors appear briefly in the Complaint on page 4, page 12 and on page 13, from lines 1 though 16. After that, the Warriors are not specifically mentioned. However, by including the Warriors as a defendant, Plaintiff’s counsel was able to file the case in San Francisco federal court, where the first-named Plaintiff’s law firm is located, and it asserts only California state law causes of action. It also means that there is U.S.-based defendant with significant assets and insurance.
Conclusion
The Warriors and Miami Heat ended or paused their relationships with FTX in early November 2022. Apparently, the Warriors’ alleged misconduct was in accepting a sponsorship agreement from a company that was to go bust within the year. Miami-Dade County has recently requested FMX’s bankruptcy judge permission to terminate the FTX naming rights agreement. The Heat or MLB may be wondering if they will also be sued because of their FTX sponsorship deals. If taken at face value, sports-related entities are now allegedly liable for the financial misdeeds of their sponsors. Wall Street was not aware of FTX’s financial shenanigans in January 2022, so it seems unlikely that the Warriors could have been aware of these issues. That is an impossible standard to place on leagues, teams, and colleges, but for now at least the Warriors will have to defend itself against these allegations.
