Gov Uscourts FLSD 638960 1 0

Case 1:23-cv-21023-CMA Document 1 Entered on FLSD Docket 03/15/2023 Page 1 of 73
UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF FLORIDA
MIAMI DIVISION
EDWIN GARRISON, et al., on behalf of

themselves and all others similarly situated, CLASS ACTION COMPLAINT
Plaintiffs, JURY TRIAL DEMANDED
v. CASE NO.:______________
KEVIN PAFFRATH, GRAHAM

STEPHAN, ANDREI JIKH, JASPREET
SINGH, BRIAN JUNG, JEREMY
LEFEBVRE, TOM NASH, BEN
ARMSTRONG, ERIKA KULLBERG,
CREATORS AGENCY, LLC,
Defendants.
/
CLASS ACTION COMPLAINT AND DEMAND FOR JURY TRIAL
Plaintiffs file this Complaint on behalf of themselves, and all other similarly situated US
and non-US FTX consumers, against Defendants, “Influencers” who promoted, assisted in, and/or
actively participated in FTX Trading LTD d/b/a FTX’s (“FTX Trading”) and West Realm Shires
Services Inc. d/b/a FTX US’s (“FTX US”) (collectively, the “FTX Entities”), offer and sale of
unregistered securities. 1
1
The Expert Report of Paul Sibenik, Lead Case Manager at CipherBlade, dated December 16,
2023) is incorporated herein by reference and attached hereto as Exhibit A. This report was filed
last year in the first class action in the country against various FTX defendants, including Sam
Bankman-Fried, other FTX insiders, and Celebrity Brand Ambassadors, which cases were
consolidated and are all pending before The Honorable K. Michael Moore. Garrison, et al. v.
Bankman-Fried, et al., No. 1:22-cv-23753-KMM (S.D. Fla.).
INTRODUCTION
1. The FTX disaster is the largest financial fraud in US history. The former FTX CEO,
Sam Bankman-Fried (“SBF”), is facing numerous criminal charges and the new CEO—who
helped wind down Enron—concluded that this fraud was worse than Enron. Billions of dollars
have been stolen from investors across the globe.
2. FTX was a centralized cryptocurrency platform which specialized in derivatives
and leveraged products. It filed for bankruptcy protection in November 2022 and will be involved
in federal bankruptcy proceedings for many years. There is no guarantee that any of the victims
will be able to see any recovery from those proceedings.
3. This action may be one of the only avenues for any of the victims to recover any of
their damages. Plaintiffs bring this action against YouTube and social media financial influencers
and promoters who shared financial advice and actively promoted FTX and its yield-bearing-
accounts (“YBAs”) to their millions of followers. Though FTX paid Defendants handsomely to
push its brand and encourage their followers to invest, Defendants did not disclose the nature and
scope of their sponsorships and/or endorsement deals, payments and compensation, nor conduct
adequate (if any) due diligence.
4. With the rise to prominence of the internet and social media, a new multi-billion-
dollar cottage industry of “Influencers” has been created. Evidence has now been uncovered that
reveals Influencers played a major role in the FTX disaster and in fact, FTX could not have arisen
to such great heights without the massive impact of these Influencers, who hyped the Deceptive
FTX Platform for undisclosed payments ranging from tens of thousands of dollars to multimillion
2
dollar bribes. 2 Indeed, the most searched companies on the internet today are cryptocurrency
brands. According to the NBA 2021–2022 Marketing & Partnerships Annual Report by
SponsorUnited, the cryptocurrency industry had a higher search volume during that year than the
entire Alcohol & Beverages industry.
5. It is paramount to understand that the Florida state law claims asserted in this action
do not require “reliance” or “deceit.” The law merely requires the named Plaintiffs (and
eventually the certified class) to have suffered damages as a result of: (a) purchasing an
“unregistered security,” and (b) that was promoted by the Defendants for their financial benefit
and/or the financial benefit of FTX.
6. The reality is that anyone around the world with a computer can now be a promoter.
Many of these paid FTX Influencers have since asked for forgiveness, because many of these
Influencers rely mainly on their alleged independence and impartiality in attracting people to join
their fanbase. 3 This Action is brought to hold liable those Influencers who specifically violated the
law under these acts and will serve as precedent to warn and guide Influencers in the future.
7. State and federal regulators have been required to quickly modify and adjust to all
of the changing sources of promoters and marketers. Starting with sponsors on radio, then
television and motion pictures and today, to the wild west of the internet, the number of companies
that specialize in promoting on social media have sky-rocketed. According to studies, those aged
2
For example, the company Coinbound touts that: We help crypto brands go viral using Web3’s
top influencers. An influencer marketing agency built for crypto. https://coinbound.io/influencers/
(accessed March 15, 2023).
3
https://www.businessinsider.com/influencers-sponsored-by-ftx-say-sorry-to-fans-2022-11
3
18 to 34 are more likely to build an interest in an investment specifically from social media, instead
of traditional news websites. 4
8. Both the Eleventh and Ninth Circuits have already recently entered opinions that
specifically social media posts and mass communications (in the cryptocurrency context) made
through the internet, exactly like the ones at issue in these claims, are sufficient to state a claim for
soliciting the sale of unregistered securities. Pino v. Cardone Capital, LLC, 55 F.4th 1253 (9th
Cir. 2022); Wildes v. BitConnect Int'l PLC, 25 F.4th 1341 (11th Cir. 2022), cert. denied sub nom.
Arcaro v. Parks, 214 L. Ed. 2d 235 (2022).
9. Numerous state courts, including in Florida, have also interpreted their own state
securities laws, such as the Florida Securities and Investor Protection Act (“FSIPA”), to go even
further and provide broader protection for investors from aiding and abetting the sale of
unregistered securities, such as these YBAs, because the FSIPA, “as its title makes clear, [was
designed] to protect the public from fraudulent and deceptive practices in the sale and marketing
of securities.” Mehl v. Office of Financial Regulation, 859 So.2d 1260, 1264–65 (Fla. 1st DCA
2003) (quoting Arthur Young & Co. v. Mariner Corp., 630 So.2d 1199, 1203 (Fla. 4th DCA 1994).
10. Literally overnight, Plaintiffs lost their assets held in their YBAs on FTX’s trading
platform as FTX imploded and filed a Chapter 11 bankruptcy petition in Delaware on an
emergency basis. In the months following FTX’s filing, its founders, including SBF, were charged
with numerous counts of fraud and money laundering (among other things) and as of the date of
this filing at least three of SBF’s cohorts pled guilty to conspiracy and other criminal charges
relating to FTX’s scheme to defraud its investors.
4
https://www.theguardian.com/money/2021/aug/22/as-finfluencers-spread-through-social-
media-beware-the-pitfalls (accessed March 15, 2023).
4
11. FTX’s fraudulent scheme was designed to take advantage of investors from across
the globe, including specifically in Florida, who sought out what was represented to be a safe
platform to make their investments in the burgeoning cryptocurrency industry. The scheme
resulted in FTX investors collectively sustaining billions of dollars in damages.
PARTIES
12. Plaintiffs are all residents of US and/or a foreign government, and all purchased
FTX YBAs.
13. Plaintiff Edwin Garrison is a citizen and resident of the State of Oklahoma. He is
a natural person over the age of 21 and is otherwise sui juris. Plaintiff Garrison purchased an
unregistered security from FTX in the form of a YBA and funded the account with a sufficient
amount of crypto assets to earn interest on his holdings. Plaintiff Garrison did so after being
exposed to some or all of Defendants’ misrepresentations and omissions regarding the FTX
Platform as detailed in this complaint, and executed trades on the FTX Platform in reliance on
those misrepresentations and omissions. As a result, Plaintiff Garrison has sustained damages for
which Defendants are liable.
14. Plaintiff Gregg Podalsky is a citizen and resident of Florida. He is a natural person
over the age of 21 and is otherwise sui juris. Plaintiff Podalsky purchased an unregistered security
from FTX in the form of a YBA and funded the account with a sufficient amount of crypto assets
to earn interest on his holdings. Plaintiff Podalsky did so after being exposed to some or all of
Defendants’ misrepresentations and omissions regarding the FTX Platform as detailed in this
complaint, and/or executed trades on the FTX Platform in reliance on those misrepresentations
and omissions. As a result, Plaintiff Podalsky has sustained damages for which Defendants are
liable.
5
15. Plaintiff Skyler Lindeen is a citizen and resident of Florida. He is a natural person
over the age of 21 and is otherwise sui juris. Plaintiff Lindeen purchased an unregistered security
to earn interest on his holdings. Plaintiff Lindeen did so after being exposed to some or all of
and omissions. As a result, Plaintiff Lindeen has sustained damages for which Defendants are
liable.
16. Plaintiff Alexander Chernyavsky is a citizen and resident of Florida. He is a
natural person over the age of 21 and is otherwise sui juris. Plaintiff Chernyavsky purchased an
amount of crypto assets to earn interest on his holdings. Plaintiff Chernyavsky did so after being
exposed to some or all of Defendants’ misrepresentations and omissions regarding the FTX
Platform as detailed in this complaint, and/or executed trades on the FTX Platform in reliance on
those misrepresentations and omissions. As a result, Plaintiff Chernyavsky has sustained damages
for which Defendants are liable.
17. Plaintiff Sunil Kavuri is a citizen and resident of the United Kingdom. He is a
natural person over the age of 21 and is otherwise sui juris. Plaintiff Kavuri purchased an
amount of crypto assets to earn interest on his holdings. Plaintiff Kavuri did so after being exposed
to some or all of Defendants’ misrepresentations and omissions regarding the FTX Platform as
detailed in this complaint, and/or executed trades on the FTX Platform in reliance on those
misrepresentations and omissions. As a result, Plaintiff Kavuri has sustained damages for which
Defendants are liable.
6
18. Plaintiff Gary Gallant is a citizen and resident of Canada. He is a natural person
over the age of 21 and is otherwise sui juris. Plaintiff Gallant purchased an unregistered security
to earn interest on his holdings. Plaintiff Gallant did so after being exposed to some or all of
and omissions. As a result, Plaintiff Gallant has sustained damages for which Defendants are liable.
19. Plaintiff David Nicol is a citizen and resident of Sydney, Australia. He is a natural
person over the age of 21 and is otherwise sui juris. Plaintiff Nicol purchased an unregistered
security from FTX in the form of a YBA and funded the account with a sufficient amount of crypto
assets to earn interest on his holdings. Plaintiff Nicol did so after being exposed to some or all of
and omissions. As a result, Plaintiff Nicol has sustained damages for which Defendants are liable.
20. The “Defendants” are digital creators who provide investor information and advice
on an array of topics, including cryptocurrency generally and FTX on their YouTube channels.
YouTube is the second largest search engine, which generates content that is accessible across the
globe.
21. The Defendants (1) all admittedly endorsed and promoted the sale of the FTX
YBAs and (2) none of them disclosed, in any of their YouTube and other social media posts, that
they were paid hundreds of thousands and/or millions of dollars by FTX and profited from the sale
of FTX YBAs, in clear violation of SEC, FTC and various federal and state regulations.
7
22. Defendant, Kevin Paffrath, a YouTube star with 1.85 million followers to his real
estate and financial tip channel “Meet Kevin,” was paid to endorse FTX, and is a citizen and
resident of Ventura, California.
23. Defendant, Graham Stephan, a YouTube star with over 4.1 million subscribers to
his YouTube pages, was paid to endorse FTX, and is a citizen and resident of Las Vegas, Nevada.
24. Defendant, Andrei Jikh, a YouTube star with over 2.2 million subscribers to his
YouTube pages, was paid to endorse FTX, and is a citizen and resident of Las Vegas, Nevada.
25. Defendant, Jaspreet Singh, a YouTube star with over 1.4 million subscribers to
his YouTube channel, “Minority Mindset,” was paid to endorse FTX, and is a citizen and resident
of Detroit, Michigan.
26. Defendant, Brian Jung, a YouTube star with over 1.3 million subscribers to his
YouTube channel, was paid to endorse FTX, and is a citizen and resident of Washington, D.C.
27. Defendant, Jeremy Lefebvre, a YouTube star with over 700,000 subscribers to his
YouTube page, Financial Education, was paid to endorse FTX, and is a citizen and resident of Las
Vegas, Nevada.
28. Defendant, Tom Nash, a YouTube star with over 283,000 subscribers to his
YouTube page, was paid to endorse FTX, and is a citizen and resident of Sydney, Australia.
29. Defendant, Ben Armstrong, a YouTube star with more than 1.5 million subscribers
to his YouTube page, was paid to endorse FTX, and is a citizen and resident of Atlanta, Georgia.
30. Defendant, Erika Kullberg is, upon information and belief, a founder of
Defendant, Creators Agency LLC (“Creators Agency”) and is currently identified on Creative
Agency’s website as one of its “Finance/Business Creators” with 18 million social media
followers.
8
31. Defendant, Creators Agency is a talent management firm and digital ad network
which promoted FTX. Upon information and belief, Creators Agency is organized and existing
under the laws of the State of Delaware and has its principal place of business in Tokyo, Japan.
JURISDICTION AND VENUE
32. This Court has subject matter jurisdiction over this action pursuant to 28 U.S.C.
§ 1332(d)(2)(A) because this is a class action for a sum exceeding $1,000,000,000.00 (one billion
dollars), exclusive of interest and costs, and in which at least one class member is a citizen of a
state different than the Defendants.
33. This Court has personal jurisdiction against Defendants because they conduct
substantial and not isolated business in Florida, and/or have otherwise intentionally availed
themselves of the Florida consumer market through the promotion, marketing, and sale of FTX’s
YBAs in Florida — including to Plaintiffs in this case — which constitutes committing a tortious
act within the state of Florida. Defendants have also marketed and participated and/or assisted in
the sale of FTX’s unregistered securities to consumers in Florida. Further, Defendants have
engaged in a conspiracy in which some of the co-conspirators—including some who are
Defendants in this action—committed overt acts in furtherance of the conspiracy in the State of
Florida. This purposeful availment renders the exercise of jurisdiction by this Court over
Defendants permissible under traditional notions of fair play and substantial justice.
34. Venue is proper in this District under 28 U.S.C. § 1391 because thousands of Class
Members either reside in this District; 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 Class
Members who reside in this District.
9
35. All conditions precedent to the institution and maintenance of this action have been
performed, excused, waived, or have otherwise occurred.
FACTUAL ALLEGATIONS
I. Background on Cryptocurrency Litigation Relating to the Promotion of YBAs
36. Back in 2017, the SEC warned that if YBAs are found to be “securities,” persons
who promote them may be liable under state and federal regulations for: (1) promoting an
unregistered security, or (2) failing to properly disclose their payments and compensation. Those
specific claims have a strict liability standard with no caveat emptor defense.
37. The question of whether the sale of FTX YBAs constitutes the sale of “unregistered
securities” under the Florida Statutes has practically been answered in the affirmative through
various regulatory statements, guidance, and actions issued by the U.S. Securities and Exchange
Commission and other regulatory entities. For example, on November 1, 2017, in the “SEC
Statement Urging Caution Around Celebrity Backed ICOs,” 5
In the SEC’s Report of Investigation concerning The DAO, 6 the

Commission warned that virtual tokens or coins sold in ICOs may
be securities, and those who offer and sell securities in the United
States must comply with the federal securities laws. Any celebrity
or other individual who promotes a virtual token or coin that is a
security must disclose the nature, scope, and amount of
compensation received in exchange for the promotion. A failure to
disclose this information is a violation of the anti-touting provisions
of the federal securities laws. Persons making these endorsements
may also be liable for potential violations of the anti-fraud
provisions of the federal securities laws, for participating in an
unregistered offer and sale of securities, and for acting as
unregistered brokers. The SEC will continue to focus on these types
of promotions to protect investors and to ensure compliance with the
securities laws.
5
https://www.sec.gov/news/public-statement/statement-potentially-unlawful-promotion-icos
(accessed March 15, 2023) (emphasis added).
6
https://www.sec.gov/litigation/investreport/34-81207.pdf (accessed March 15, 2023).
10
38. The SEC and state securities regulators over the past five years have already found
liable numerous celebrities, cryptocurrency brokers and exchanges just like FTX for offering this
exact same type of interest-bearing account, finding that exchanges such as BlockFi, 7 Voyager, 8
and Celsius 9 all offered these same accounts as unregistered securities.
39. A second narrow issue that is common to the entire Proposed Class, whose focus is
solely objective, is whether these Defendants violated Florida’s consumer laws by failing to abide
by the FTC’s long-established rules and regulations regarding the requirements that must be met
in connection with celebrity endorsements, including of items such as cryptocurrency.
40. In particular, Plaintiffs’ claims arise from their purchase of and investment in
FTX’s YBAs, which, FTX marketed through Defendants, as a type of savings account that every
customer who signed up for the FTX app received by default, and which, as explained below, was
guaranteed to generate returns on their significant holdings in the accounts, regardless of whether
those assets were held as legal tender or cryptocurrency, and regardless of whether any trades were
made with the assets held in the YBA. That is the narrative that Defendants pushed in promoting
the offer and sale of the YBAs, which are unregistered securities. For that, the Defendants are
liable for Plaintiffs’ losses, jointly and severally and to the same extent as if they were themselves
the FTX Entities.
41. Literally overnight, Plaintiffs’ assets held in their YBAs on the FTX Platform were
unavailable to them as FTX imploded and filed a Chapter 11 bankruptcy petition in Delaware on
7
https://www.sec.gov/news/press-release/2022-26 (accessed March 15, 2023).
8
See, e.g., https://www.nj.gov/oag/newsreleases22/Voyager%20Summary%20Order.pdf (
accessed March 13, 2023); https://dfr.vermont.gov/sites/finreg/files/regbul/dfr-order-22-004-s-
voyager.pdf (accessed March 13, 2023)
9
https://www.nj.gov/oag/newsreleases21/Celsius-Order-9.17.21.pdf (accessed March 13, 2023).
11
an emergency basis. This happened because, as explained by the new CEO of the failed FTX
Entities:
I have over 40 years of legal and restructuring experience. I have

been the Chief Restructuring Officer or Chief Executive Officer in
several of the largest corporate failures in history. I have supervised
situations involving allegations of criminal activity and malfeasance
(Enron). I have supervised situations involving novel financial
structures (Enron and Residential Capital) and cross-border asset
recovery and maximization (Nortel and Overseas Shipholding).
Nearly every situation in which I have been involved has been
characterized by defects of some sort in internal controls, regulatory
compliance, human resources and systems integrity.
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.
See In re: FTX Trading Ltd, et al., No. 22-11068 (JTD), ECF No. 24, ¶¶ 4–5 (D. Del. Nov. 17,
2022) (emphasis added).
42. The losses associated with malfeasance in the cryptocurrency sector are growing
by the billions almost every day. More crypto companies are filing new federal bankruptcy
petitions each day, all running for protection from the billions of dollars of losses they directly
caused to thousands of investors here in Florida and across the globe. This is by far the largest
securities national disaster, greatly surpassing the Madoff ponzi scheme.
43. The deceptive and failed FTX platform emanated from right here in Miami, Florida,
FTX’s domestic headquarters and the host of the largest and most famous cryptocurrency
conventions. FTX its fraudulent plan was put into effect from its worldwide headquarters located
here in Miami, Florida. Miami became the “hot spot” for crypto companies, hosting the most
investments in crypto startups as well as the annual Bitcoin Miami 2022 Global Forum. Several
crypto companies, including crypto exchange Blockchain.com, Ripple and FTX.US, moved their
12
headquarters to Miami. Others, including fellow exchange eToro, expanded their U.S. presence
with offices in Miami. FTX was already very familiar with Miami, signing a deal worth more than
$135 million dollars for the naming rights of the waterfront arena, where the Miami Heat—who
are 3-time NBA Champions—play.
II. Background on FTX
44. Until seeking the protection of the Bankruptcy Court, the FTX Entities operated a
multi-billion-dollar mobile application cryptocurrency investment service (the “FTX Platform”)
that placed cryptocurrency trade orders on behalf of users like Plaintiff and Class Members and
offered interest bearing cryptocurrency accounts.
45. In many ways, centralized cryptocurrency exchanges, including FTX, are
analogous to banks albeit for the cryptocurrency industry. More specifically, cryptocurrency
exchanges accept deposits of cryptocurrency, and often fiat currency on behalf of their customers.
Once that cryptocurrency is received by the exchange, the exchange has dominion and control over
those assets.
46. The exchange then credits the applicable customer account with the appropriate
amount of cryptocurrency or fiat assets the exchange received. This credit can be regarded as a
liability of the exchange to its customer. One major factor that affects the exchange’s ability to
process such requests is whether they have the assets and/or capital necessary to do so. For any
non-yield-bearing account, liquidity should not be a problem, since exchanges should have enough
assets in custody for the benefit of their customers to cover their liabilities to their customers, on
a 1:1 basis.
47. FTX’s terms of service guaranteed that title to the digital assets in customer
accounts remained with the customer and that customers controlled the digital assets in their
accounts. FTX violated its own terms of service.
13
48. While FTX violated its own terms of service, it would also have been true that some
of these claims would have been demonstrably false to begin even if there was hypothetically no
wrongdoing on the part of FTX because FTX exchange accounts are custodial in nature. This
means that the customer does not control access to the assets “in” their account. Rather, the
customer needs to make a request to the exchange to be able to access and send those balances,
which then debits the user account and sends the assets. Whether or not such requests are processed
is dependent on the willingness, ability, and approval of the exchange.
49. With any yield-bearing account, it could generally be expected for an exchange to
take those customers and leverage, loan or invest them in some way, and hopefully receive enough
assets back to be able to pay out their customers back their principal, in addition to yield or interest
earned, when applicable customers attempt to redeem or withdraw those funds.
50. While the existence of such loans associated with assets deposited to yield-bearing
accounts was known, the substantial risks associated with such loans, and by extension the yield-
bearing accounts in general was not adequately represented.
51. The main functional differences between banks and cryptocurrency exchanges is
that exchanges are largely unregulated, and that exchanges (and by extension exchange accounts
and the users who use them) are subject to a lot of additional risks compared to that of a bank
account.
52. Banks are regulated with regards to the type of assets that they can investment
customer assets in, subject to regular financial audits, and have regulatory oversight to ensure the
protection of consumer assets. And of course, bank accounts are insured by the Federal Deposit
Insurance Corporation (“FDIC”), ensuring that bank account holders have coverage in case a bank,
despite such measures, becomes insolvent. Id.
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53. In contrast, exchanges like FTX are not subject to the same capital control
requirements as banks. While almost all exchanges will indicate that they “securely” store all
customer assets 1:1 in “cold storage,” there is no regulatory requirement in most jurisdictions
(including the U.S.) for exchanges to do so, nor is there any requirement for exchanges to offer
any transparency regarding their solvency or use of customer assets to regulators or the public.
54. Other than by an exchange’s own terms of service – which FTX violated –
exchanges are not prevented from investing customer assets elsewhere, and if so, what types of
investments they enter into, or loans they provide, regardless of the inherent level of risk. Nor are
there any requirements for exchanges to have any type of insurance equivalent to FDIC insurance.
While some exchanges will sometimes claim they have ‘insurance,’ the terms and conditions
associated with that insurance are typically completely unknown to investors, and often this
insurance will bear little to no resemblance to FDIC insurance; in essence the term ‘insurance’ is
used as a marketing ploy to help instill customer confidence in the exchange, even when such
confidence may not be warranted.
55. Due to the risks surrounding the lack of regulation, as well various types of
cybersecurity-related risks that aren’t applicable to banks but are critically important for
exchanges, cryptocurrency exchanges are generally not and should not be considered a ‘safe’ place
to store assets, whether cryptocurrency assets or fiat assets.
56. Indeed, there is an extensive track record of the cryptocurrency exchanges that have
shut down and ultimately failed, 10 often in spectacular fashion. The most common reasons for an
exchange’s failure include:
10
https://www.cryptowisser.com/exchange-graveyard/ (accessed March 15, 2023).
15
a) The exchange borrowing against customer assets (either to fund business

operations or lending them out in an effort to generate a profit) leading to
insolvency.
b) The exchange trading or leveraging customer assets in an effort to generate a
profit, leading to insolvency.
c) A hack or theft by an external actor
d) Embezzlement, or theft by an internal actor, typically founder(s) of the exchange
e) Disappeared suddenly, for no apparent reason (typically taking customer assets
with them).
Id.
57. When exchanges do shut down, it rarely happens in an organized and orderly
fashion, and it’s incredibly rare for customers that had assets on the exchange to get all their assets
back; in many cases, they end up getting nothing back. That is because investors’ cryptocurrency
belongs to the exchange if they elect to store it “on” the exchange, and if the exchange reneges or
is unable to fulfill its liability to the investor, the investor as the beneficial cryptocurrency owner
of the cryptocurrency has effectively lost its money.
III. The Rise and Fall of FTX and Alameda
58. FTX launched in May 2019 and rapidly became a leading cryptocurrency exchange.
FTX was led by SBF as its founder and Chief Executive Officer.
59. Prior to founding FTX, the Silicon Valley-born, MIT-educated SBF launched his
quantitative crypto trading firm, Alameda Research, in November 2017, 11 after stints in the charity
world and at trading firm Jane Street. 12 Quantitative trading consists of trading strategies based on
11
https://www.businessinsider.com/ftx-crypto-king-sam-bankman-fried-rise-and-fall-2022-11
12
https://www.businessinsider.com/ftx-sbf-crypto-saga-explained-what-happened-what-it-
means-2022-11?inline-endstory-related-recommendations= (accessed March 15, 2023).
16
quantitative analysis, which rely on mathematical computations and number crunching to identify
trading opportunities.
60. By 2018, Bankman-Fried had persuaded Caroline Ellison to join him at Alameda
Research. In an interview for Forbes magazine regarding her initial impressions of Alameda,.
Ellison described the recruitment as follows: “This was very much like, ‘oh, yeah, we don’t really
know what we’re doing,’”
61. In late 2018, Alameda Research relocated its headquarters to Hong Kong. The team
at Alameda Research included SBF’s close friends (and later co-founders of FTX) Nishad Singh
and Gary Wang. Ellison and Sam Trabucco were also part of the group and upon moving to Hong
Kong the group lived like college students and actively traded crypto.
62. Bankman-Fried got rich off FTX and Alameda, with the two companies netting
$350 million and $1 billion in profit, respectively, in 2020 alone, according to Bloomberg.
63. The FTX.com exchange was extremely successful since its launch. In 2022, around
$15 billion of assets were traded daily on the platform, which represented approximately 10% of
global volume for crypto trading. The FTX team grew to over 300 globally. Although the FTX
Entities’ primary international headquarters was in the Bahamas, its domestic US base of
operations was in Miami, Florida. 13
64. FTX quickly became one of the most utilized avenues for nascent investors to
purchase cryptocurrency. By the time FTX filed for bankruptcy protection, customers had
entrusted billions of dollars to it, with estimates ranging from $10-to-$50 billion dollars.
65. At his peak, Bankman-Fried was worth $26 billion. At 30, he had become a major
political donor, gotten celebrities and social medial influencers like the Defendants in this action
13
https://www.coindesk.com/business/2022/09/27/crypto-exchange-ftx-is-moving-its-us-
headquarters-from-chicago-to-miami/ (accessed March 15, 2023).
17
to vociferously promote FTX, and secured the naming rights to the arena where the NBA’s Miami
Heat play. 14
66. Bankman-Fried’s cryptocurrency empire was officially broken into two main parts:
FTX (his exchange) and Alameda Research (his trading firm), both giants in their respective
industries.
67. Even though they are two separate businesses, the division between FTX and
Alameda breaks down in a key place: on Alameda’s balance sheet, which was full of the FTT
token issued by the FTX exchange that grants holders a discount on trading fees on its marketplace.
FTT tokens were the so-called “native token” of the FTX exchange: FTX created FTT and issued
it to both institutional and retail investors without registering with any regulator or undergoing any
audit or other external due diligence. FTX was able to create unlimited amounts of FTT. Thus, in
essence, Bankman-Fried’s trading giant Alameda rested on a foundation largely made up of a coin
that a sister company invented, not an independent asset like a fiat currency or another crypto.
68. Alameda borrowed assets from FTX’s customers, providing FTT tokens as
collateral for those loans. Alameda also engaged in margin trading, essentially borrowing money
to execute risky trading strategies, which trades in turn were secured by the assets Alameda had
borrowed from FTX customers’ accounts. That leverage made Alameda’s trades (and thus FTX
customers’ funds) highly vulnerable to adverse market movements. 15
69. After suffering large losses in the wake of several high profile crypto-firm failures
14
https://www.businessinsider.com/ftx-sbf-crypto-saga-explained-what-happened-what-it-means-
2022-11?inline-endstory-related-recommendations= (accessed March 15, 2023).
15
https://www.coindesk.com/business/2022/11/02/divisions-in-sam-bankman-frieds-crypto-
empire-blur-on-his-trading-titan-alamedas-balance-sheet/ (accessed March 15, 2023).
18
in the spring and summer of 2022, Alameda borrowed from FTX some of its customers’ assets. 16
Some have suggested that the loans were made for free. 17
70. Having borrowed those customer assets, Alameda could then use them as cheap
collateral for margined trades with other parties. 18 Indeed, obtaining collateral from other sources
would have been much more expensive.
71. In an Alameda balance sheet leaked in early November 2022, FTT tokens were
listed as Alameda’s largest asset holdings. Other assets listed on that balance sheet included SOL
tokens (issued by the Solana blockchain, in which Sam Bankman-Fried was an early investor) and
SRM tokens (issued by the Serum exchange that Sam Bankman-Fried co-founded). 19 Alameda
had few assets that had not been created out of thin air by FTX or FTX-related entities, and when
falling crypto prices reduced the value of FTT, Alameda struggled to pay off its lenders. 20
72. In early November 2022, crypto publication CoinDesk released a bombshell report
that called into question just how stable Bankman-Fried’s empire really was. 21
73. After obtaining this information, Changpeng “CZ” Zhao, the CEO of Binance,
decided to liquidate roughly $530 million-worth of FTT. Customers also raced to pull out, and
16
https://newsletter.mollywhite.net/p/the-ftx-collapse-the-latest-revelations (accessed March 15,
2023).
17
https://www.cnbc.com/2022/11/13/sam-bankman-frieds-alameda-quietly-used-ftx-customer-
funds-without-raising-alarm-bells-say-sources.html (accessed March 15, 2023).
18
For a more general discussion of the conflicts of interest inherent in these relationships, see
https://www.coppolacomment.com/2022/11/the-ftx-alameda-nexus.html (accessed March 15,
2023).
19
20
https://www.nytimes.com/2022/11/30/business/dealbook/ftx-almeda-research-sam-bankman-
fried.html#:~:text=Alameda%20served%20as%20the%20token's,to%20facilitate%20its%20tradi
ng%20activities. (accessed March 15, 2023)
21
https://www.businessinsider.com/ftx-sbf-crypto-saga-explained-what-happened-what-it-
means-2022-11?inline-endstory-related-recommendations= (accessed March 15, 2023.
19
FTX saw an estimated $6 billion in withdrawals over the course of 72 hours, which it struggled to
fulfill. 22 The value of FTT plunged 32%, but rallied once again with Bankman-Fried’s surprise
announcement on Tuesday, November 8, 2022, that Binance would buy FTX, effectively bailing
it out. 23
74. The next day, Binance announced that it was withdrawing from the deal, citing
findings during due diligence, as well as reports of mishandled customer funds and the possibility
of a federal investigation. 24 The news sent FTT plunging even further — Bankman-Fried saw 94%
of his net worth wiped out in a single day. 25 On November 11, 2022, unable to obtain a bailout,
FTX filed for Chapter 11 bankruptcy and Bankman-Fried resigned as CEO. 26
75. This chain of events was entirely foreseeable to those who were aware of FTX’s
relationship with Alameda, and their respective dependence on the purported value of FTT. Indeed,
as discussed above, their respective reliance on FTT as a mechanism to prop them up and to
purportedly offer protection (which was in effect illusory) to FTX customers’ whose assets had
been lent to Alameda was a risk that was obvious to insiders, but otherwise undisclosed to the
market and FTX’s customers. The very risk of which Alameda, FTX, and its insiders were aware,
accordingly, swiftly came to bear, and FTX’s customers were the victims.
22
https://markets.businessinsider.com/news/currencies/ftx-6-billion-withdrawals-72-hours-sam-
bankman-fried-binance-2022-11 (accessed March 15, 2023).
23
https://markets.businessinsider.com/news/currencies/ftx-6-billion-withdrawals-72-hours-sam-
bankman-fried-binance-2022-11 (accessed March 15, 2023).
24
https://markets.businessinsider.com/news/currencies/ftx-crash-sec-cftc-probes-asset-liability-
shortfall-6-billion-2022-11 (accessed March 15, 2023).
25
https://www.businessinsider.com/ftx-ceo-crypto-binance-sam-bankman-fried-wealth-wiped-
out-2022-11 (accessed March 15, 2023).
26
https://markets.businessinsider.com/news/currencies/ftx-bankruptcy-sam-bankman-fried-ceo-
crypto-binance-alameda-markets-2022-11 (accessed March 15, 2023).
20
76. Following his resignation, Bankman-Fried issued a 22-tweet-long explanation of
where he believed he and the FTX Entities went wrong: 27
27
https://twitter.com/SBF_FTX/status/1590709189370081280 (accessed March 15, 2023).
21
22
23
24
25
26
77. According to a recent Reuters report, however, another explanation contributing to
the precarious house of cards that was the FTX Platform is that earlier this year, Bankman-Fried
secretly transferred at least $4 billion in customer funds from FTX to Alameda without telling
anyone, after Alameda was hit with a series of losses, and that the FTX entities lent more than half
of its $16 billion in customer funds to Alameda in total, with more than $10 billion in loans
outstanding.28
IV. FTX Insiders Plead Guilty to Numerous Criminal Charges Relating to FTX’s
Fraudulent Scheme
78. On January 3, 2023, SBF pled not guilty to eight criminal charges during a court
hearing at the U.S. District Court for the Southern District in USA v. Bankman-Fried, 1:22-cr-
00673-LAK-1. On February 23, 2023, a Superseding Indictment was unsealed, which added four
more charges, including charges for conspiracy to commit bank fraud and unlicensed money
transmitting business, and money laundering. Id., Doc. 80. SBF faces over 100 years in prison in
connection with charges predicated on his lying to investors and stealing billions of dollars in
customers’ money. His trial is set to commence in October 2023.
79. In December 2022, Ellison and Wang pled guilty to criminal charges stemming
from FTX’s collapse, including conspiracy to commit wire fraud, conspiracy to commit
28
https://markets.businessinsider.com/news/currencies/ftx-crash-client-funds-alameda-binance-
sbf-sec-cftc-probe-2022-11?utm_medium=ingest&utm_source=markets (accessed March 15,
2023).
27
commodities fraud, conspiracy to commit securities fraud, and conspiracy to commit money
laundering. In entering her guilty plea, Ellison told a federal judge in Manhattan:
From approximately March 2018 through November 2022, I worked at Alameda

Research, a cryptocurrency trading firm principally owned by Sam Bankman-
Fried.
From 2019 through 2022, I was aware that Alameda was provided access to a
borrowing facility on FTX.com, the cryptocurrency exchange run by Mr.
Bankman-Fried. I understood that FTX executives had implemented special
settings on Alameda’s FTX.com account that permitted Alameda to maintain
negative balances in various fiat currencies and crypto currencies. In practical
terms, this arrangement permitted Alameda access to an unlimited line of credit
without being required to post collateral, without having to pay interest on
negative balances and without being subject to margin calls or FTX.com's
liquidation protocols. I understood that if Alameda’s FTX accounts had
significant negative balances in any particular currency, it meant that Alameda
was borrowing funds that FTX's customers had deposited onto the exchange.
While I was co-CEO and then CEO, I understood that Alameda had made
numerous large illiquid venture investments and had lent money to Mr.
Bankman-Fried and other FTX executives. I also understood that Alameda had
financed these investments with short-term and open-term loans worth several
billion dollars from external lenders in the cryptocurrency industry. When many
of those loans were recalled by Alameda’s lenders in and around June 2022, I
agreed with others to borrow several billion dollars from FTX to repay those
loans. I understood that FTX would need to use customer funds to finance its
loans to Alameda. I also understood that many FTX customers invested in crypto
derivatives and that most FTX customers did not expect that FTX would lend
out their digital asset holdings and fiat currency deposits to Alameda in this
fashion. From in and around July 2022 through at least October 2022, I agreed
with Mr. Bankman-Fried and others to provide materially misleading financial
statements to Alameda's lenders. In furtherance of this agreement, for example,
we prepared certain quarterly balance sheets that concealed the extent of
Alameda's borrowing and the billions of dollars in loans that Alameda had made
to FTX executives and to related parties. I also understood that FTX had not
disclosed to FTX's equity investors that Alameda could borrow a potentially
unlimited amount from FTX, thereby putting customer assets at risk. I agreed
with Mr. Bankman-Fried and others not to publicly disclose the true nature of
the relationship between Alameda and FTX, including Alameda's credit
arrangement.
I also understood that Mr. Bankman-Fried and others funded certain investments
in amounts more than $10,000 with customer funds that FTX had lent to
28
Alameda. The investments were done in the name of Alameda instead of FTX
in order to conceal the source and nature of those funds. I am truly sorry for what
I did. I knew that it was wrong. And I want to apologize for my actions to the
affected customers of FTX, lenders to Alameda and investors in FTX. Since
FTX and Alameda collapsed in November 2022, I have worked hard to assist
with the recovery of assets for the benefit of customers and to cooperate with
the government’s investigation. I am here today to accept responsibility for my
actions by pleading guilty. 29
80. In entering his guilty plea, Wang similarly told the federal judge in Manhattan:
Between 2019 and 2022, as part of my employment at FTX, I was directed to

and agreed to make certain changes to the platform’s code. I executed those
changes, which I knew would Alameda Research special privileges on the FTX
platform. I did so knowing that others were representing to investors and
customers that Alameda had no such special privileges and people were likely
investing in and using FTX based in part on those misrepresentations. I knew
what I was doing was wrong. I also knew that the misrepresentations were being
made by telephone and internet, among other means, and that assets traded on
FTX included some assets that the U.S. regulators regard as securities and
commodities.
81. On February 28, 2023, Nishad Singh, who was one of SBF’s best friends, a core
Alameda engineer, and head of FTX’s engineering, also pled guilty to criminal counts for
conspiracy to commit fraud and conspiracy to commit money laundering. He agreed to cooperate
with prosecutors’ investigation into Bankman-Fried, apologized for his role in FTX’s scheme, and
admitted that he knew by mid-2022 that Alameda was borrowing FTX customer funds and that
customers were not aware. 30
V. The SEC’s Consistent Approach to Cryptocurrency
A. Overview
82. The SEC’s stance on cryptocurrency has been clear and consistent from the
beginning. The Securities and Exchange Acts intentionally are drafted to apply to a broad range of
29
https://www.johnreedstark.com/wp-content/uploads/sites/180/2022/12/Ellison-Hearing-
Transcript.pdf (last accessed March 15, 2023)
30
https://www.reuters.com/legal/ftxs-singh-agrees-plead-guilty-us-criminal-charges-lawyer-
says-2023-02-28/ (accessed March 15, 2023).
29
securities. As such, the definitions of “security” in Section 2(a)(1) of the Securities Act of
1933 (Securities Act), 15 U.S.C. 77b(a)(1), and Section 3(a)(10) of the Securities Exchange Act
of 1934 (Exchange Act), 15 U.S.C. 78c(a)(10), include not only conventional securities, such as
“stock[s]” and “bond[s],” but also the more general term “investment contract.”
83. Along these lines, in Reves v. Ernst & Young, the Supreme Court stated that:
The fundamental purpose undergirding the Securities Acts is ‘to

eliminate serious abuses in a largely unregulated securities
market.’ United Housing Foundation, Inc. v. Forman, 421 U.S.
837, 421 U.S. 849 (1975). In defining the scope of the market that
it wished to regulate, Congress painted with a broad brush. It
recognized the virtually limitless scope of human ingenuity,
especially in the creation of ‘countless and variable schemes
devised by those who seek the use of the money of others on the
promise of profits, SEC v. W.J. Howey Co., 328 U.S. 293, 328 U.S.
299 (1946), and determined that the best way to achieve its goal of
protecting investors was ‘to define the term ”security” in
sufficiently broad and general terms so as to include within that
definition the many types of instruments that in our commercial
world fall within the ordinary concept of a security.’ . . . Congress
therefore did not attempt precisely to cabin the scope of the
Securities Acts . . . Rather, it enacted a definition of ‘security’
sufficiently broad to encompass virtually any instrument that might
be sold as an investment.” (emphasis added) 31
84. Crafted to contemplate not only known securities arrangements at the time, but also
any prospective instruments created by those who seek the use of others’ money on the promise
of profits, the definition of “security” is broad, sweeping, and designed to be flexible to capture
new instruments that share the common characteristics of stocks and bonds. As Supreme Court
Justice (and former SEC Commissioner (1935) and Chair (1936-37)) William O. Douglas opined
in Superintendent of Insurance v. Bankers Life and Casualty Co.:
We believe that section 10(b) and Rule 10b-5 prohibit all fraudulent
schemes in connection with the purchase or sale of securities,
whether the artifices employed involve a garden type variety fraud,
31
https://scholar.google.com/scholar_case?case=18068523124125938239&q=Reves+v.+Ernst+
%26+Young&hl=en&as_sdt=400006&as_vis=1 (accessed March 15, 2023).
30
or present a unique form of deception. Novel or atypical methods

should not provide immunity from the securities laws.
85. Federal courts have already confirmed the SEC’s jurisdiction in numerous crypto-
related emergency asset freeze hearings where the issue is always considered and affirmed, same
as it has been by hundreds of federal courts across the country since the Howey Decision, which
the Supreme Court adopted over 75 years ago. 32 That decision resulted in the Howey Test, which
is used to determine the presence of an investment contract. The Howey Test provides that an
investment contract exists if there is an “investment of money in a common enterprise with a
reasonable expectation of profits to be derived from the efforts of others.” 33 The Howey Test is the
principal method used by the SEC to determine if a given cryptocurrency is a security.
86. The SEC has used multiple distribution channels to share its message and concerns
regarding crypto, digital trading platforms, initial coin offerings, and other digital asset products
and services over the past decade. The SEC first made investors aware of the dangers of investing
in cryptocurrency in 2013 when the Office of Investor Education and Advocacy issued an Investor
Alert on “Ponzi Schemes Using Virtual Currencies.” 34
87. A year later, the same office issued an Investor Alert on “Bitcoin and Other Virtual
Currency-Related Investments.” 35 In 2017, the Commission took the rare step of releasing a
Section 21(a) Report of Investigation that looked at the facts and circumstances of The DAO,
which offered and sold approximately 1.15 billion DAO Tokens in exchange for a total of
32
https://supreme.justia.com/cases/federal/us/328/293/ (accessed March 15, 2023).
33
Id.
34
ia_virtualcurrencies.pdf (sec.gov) (accessed March 15, 2023).
35
Investor Alert: Bitcoin and Other Virtual Currency-Related Investments | Investor.gov (accessed
March 15, 2023).
31
approximately 12 million Ether (“ETH”) over a one-month period in 2016. 36 The SEC applied the
Howey Test to the DAO tokens and concluded they were securities under the Securities Act of
1933 (“Securities Act”) and the Securities Exchange Act of 1934 (“Exchange Act”). While The
DAO, and DAO tokens, were no longer operational at the time due to a high-profile hack that
resulted in the theft of most DAO tokens, the Commission chose to release the report so as “to
advise those who would use a Decentralized Autonomous Organization (“DAO Entity”), or other
distributed ledger or blockchain-enabled means for capital raising, to take appropriate steps to
ensure compliance with the U.S. federal securities laws.” 37
88. In 2019, the SEC released a “Framework for ‘Investment Contract’ Analysis of
Digital Assets” which provided additional details on when a digital asset has the characteristics of
an investment contract and “whether offers and sales of a digital asset are securities transactions.”38
89. In addition, the SEC has publicized its position on cryptocurrency in
countless enforcement actions, 39 multiple speeches, 40 Congressional testimony,41 and
several official SEC statements 42 and proclamations. 43 Current SEC Chairman, Gary Gensler, has
spoken frequently about the perils and illegality of crypto lending platforms and decentralized
36
https://www.sec.gov/litigation/investreport/34-81207.pdf (accessed March 15, 2023).
37
Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: The
DAO (accessed March 15, 2023).
38
SEC.gov | Framework for “Investment Contract” Analysis of Digital Assets (accessed March
15, 2023).
39
SEC.gov | Crypto Assets and Cyber Enforcement Actions (accessed March 15, 2023).
40
https://www.sec.gov/news/speech/gensler-aspen-security-forum-2021-08-03 (accessed March
15, 2023).
41
https://www.sec.gov/news/testimony/gensler-2021-05-26 (accessed March 15, 2023).
42
https://www.sec.gov/news/public-statement/statement-clayton-2017-12-11(accessed March 15,
2023).
43
https://www.sec.gov/news/public-statement/enforcement-tm-statement-potentially-unlawful-
online-platforms-trading (accessed March 15, 2023).
32
finance, 44 warning that their failure to register with the SEC may violate U.S. securities laws. 45 In
one interview, Gensler said:
The law is clear, it’s not about waving a wand. Congress spoke about
this in 1934 . . . When a [digital] platform has securities on it, it is
an exchange, and it’s a question of whether they’re registered or
they’re operating outside of the law and I’ll leave it at that. 46
90. On September 8, 2022, Chair Gensler gave a speech reflecting on the flexibility of
the securities laws and the SEC’s consistency in applying these laws to cryptocurrency. 47 Gensler
noted that of the 10,000 different cryptocurrencies in the market, “the vast majority are securities,”
a position that was also held by his predecessor, Jay Clayton. 48 Gensler went on to note that the
SEC has spoken with a “pretty clear voice” when it comes to cryptocurrency “through the DAO
Report, the Munchee Order, and dozens of Enforcement actions, all voted on by the Commission”
and that “[n]ot liking the message isn’t the same thing as not receiving it.” 49
91. The judicial record supports Chair Gensler’s assertions. The SEC has taken over
100 crypto-related enforcement actions and has not lost a single case. 50
92. What follows are summaries of five cases that will help inform this litigation.
B. SEC v. KIK
44
https://www.theblock.co/post/113416/gensler-speech-crypto-defi-lending-sec(accessed March
15, 2023).
45
https://ca.finance.yahoo.com/news/crypto-platforms-dont-register-with-sec-outside-the-law-
gensler- 164215740.html (accessed March 15, 2023).
46
https://www.theblock.co/post/113416/gensler-speech-crypto-defi-lending-sec(accessed March
15, 2023).
47
SEC.gov | Kennedy and Crypto (accessed March 15, 2023).
48
Id.
49
Id.
50
SEC Cryptocurrency Enforcement: 2021 Update (cornerstone.com) (accessed March 15, 2023).
33
93. In Kik 51, the SEC’s complaint 52, filed in the U.S. District Court for the Southern
District of New York on June 4, 2019, alleged that Kik sold digital asset securities to U.S. investors
without registering their offer and sale as required by the U.S. securities laws. Kik argued that the
SEC’s lawsuit against it should be considered “void for vagueness.” 53
94. The court granted the SEC’s motion for summary judgment on September 30, 2020,
finding that undisputed facts established that Kik’s sales of “Kin” tokens were sales of investment
contracts (and therefore of securities) and that Kik violated the federal securities laws when it
conducted an unregistered offering of securities that did not qualify for any exemption from
registration requirements. The court further found that Kik’s private and public token sales were a
single integrated offering.
C. SEC v. Telegram
95. In Telegram, 54 the SEC filed a complaint 55 on October 11, 2019, alleging that the
company had raised capital to finance its business by selling approximately 2.9 billion “Grams” to
171 initial purchasers worldwide. The SEC sought to preliminarily enjoin Telegram from
delivering the Grams it sold, which the SEC alleged were securities that had been offered and sold
in violation of the registration requirements of the federal securities laws.
96. Telegram argued 56 that the SEC has “engaged in improper ‘regulation by
enforcement’ in this nascent area of the law, failed to provide clear guidance and fair notice of its
51
52
53
https://www.financemagnates.com/cryptocurrency/news/sec-seeks-to-block-kik-subpoenas-
refutes-void-for-vagueness-claim/ (accessed March 15, 2023).
54
55
56
https://www.financemagnates.com/cryptocurrency/news/sec-vs-telegram-will-gram-tokens-
ever-be-distributed/ (accessed March 15, 2023).
34
views as to what conduct constitutes a violation of the federal securities laws, and has now adopted
an ad hoc legal position that is contrary to judicial precedent and the publicly expressed views of
its own high-ranking officials.”
97. On March 24, 2020, the U.S. District Court for the Southern District of New York
issued a preliminary injunction 57 barring the delivery of Grams and finding that the SEC had
shown a substantial likelihood of proving that Telegram’s sales were part of a larger scheme to
distribute the Grams to the secondary public market unlawfully.
98. Without admitting or denying the allegations in the SEC’s complaint, the
defendants consented to the entry of a final judgment enjoining them from violating the registration
provisions of Sections 5(a) and 5(c) of the Securities Act of 1933. The judgment ordered the
defendants to disgorge, on a joint and several basis, $1,224,000,000.00 in ill-gotten gains from the
sale of Grams, with credit for the amounts Telegram pays back to initial purchasers of Grams. It
also ordered Telegram Group Inc. to pay a civil penalty of $18,500,000. For the next three years,
Telegram is further required to give notice to the SEC staff before participating in the issuance of
any digital assets.
D. SEC v. BlockFi
99. In BlockFi Lending LLC, the first SEC case ever involving a crypto-lending
program, on February 22, 2022, the SEC charged BlockFi 58with failing to register the offers and
57
SEC v. Telegram: A Groundbreaking Decision in Cryptocurrency Enforcement? | Insights |
Greenberg Traurig LLP (gtlaw.com) (accessed March 15, 2023).
58
https://lnkd.in/d-Xy45ec (accessed March 15, 2023).
35
sales of its retail crypto-lending product and also charged BlockFi with violating the registration
provisions of the Investment Company Act of 1940.
100. BlockFi argued for “increased regulatory clarity” but lost. 59
101. To settle the SEC’s charges, BlockFi agreed to pay a $50 million penalty, cease its
unregistered offers and sales of the lending product, BlockFi Interest Accounts (BIAs), and bring
its business within the provisions of the Investment Company Act within 60 days. BlockFi’s parent
company also announced that it intends to register under the Securities Act of 1933 the offer and
sale of a new lending product. In parallel actions, BlockFi agreed to pay an additional $50 million
in fines to 32 states to settle similar charges.
E. SEC Wells Notice to Coinbase
102. In 2021, Coinbase began marketing a cryptocurrency lending product called Lend.
The Lend program purported to allow some Coinbase customers to ”earn interest on select assets
on Coinbase, starting with 4% APY on USD Coin (USDC).” 60 According to Coinbase, its lawyers
reached out to the SEC to discuss its Lend product, at which point SEC staff instead served
Coinbase with a Wells Notice, informing Coinbase of their intention to seek approval from the
SEC Commissioners to file a civil enforcement action against Coinbase for violating the federal
securities laws.
103. According to Coinbase, the SEC issued the Wells Notice because of Coinbase’s
failure to file a registration statement with the SEC for the offering of its Lend product, which the
SEC believed was a security. 61
59
https://blockfi.com/pioneering-regulatory-clarity (accessed March 15, 2023).
60
The SEC has told us it wants to sue us over Lend. We don’t know why. - Blog (coinbase.com)
61
Id.
36
104. The two cases that Coinbase claims the SEC cites as support for its Wells Notice
are SEC v. Howey and Reves v. Ernst & Young. Reves addressed the question of whether a product
is a “note” and hence a security (applying the so-called “Family Resemblance Test”).
105. Under the Lend program, Coinbase customers were clearly investing “money” at
Coinbase and placing their faith in Coinbase to generate a profit for them. Lend investors would
have no say in how Coinbase runs the Lend program and Coinbase was not going to permit Lend
investors to participant in Lend-related decisions. Given these facts, Lend was clearly an
investment contract.
106. Under Reves, Lend may have also been a “note” and hence a security. Although the
term “note” is included in the statutory definition of a security, case law has determined that not
every “note” is a security. The definition specifically excludes notes with a term of less than nine
months and courts have carved out a range of exemptions over the years for commercial paper-
type notes such as purchase money loans and privately negotiated bank loans. To reconcile these
varying cases, the U.S. Supreme Court in Reves established the “family resemblance test,” to
determine whether a note is a security.
107. Per the “family resemblance test,” a presumption that a note is a security can only
be rebutted if the note bears a resemblance to one of the enumerated categories on a judicially
developed list of exceptions, as follows: 1) a note delivered in consumer financing; 2) a note
secured by a mortgage on a home; 3) a short-term note secured by a lien on a small business or
some of its assets; 4) a note evidencing a character loan to a bank customer; 5) a short-term note
secured by an assignment of accounts receivable; 6) a note which simply formalizes an open-
account debt incurred in the ordinary course of business (such as a trade payable for office
supplies); and 7) a note evidencing loans by commercial banks for current operations.
108. The “family resemblance” analysis requires:
37
• A consideration of the motivation of the seller and buyer (e.g. is the seller
looking for investment and the buyer looking for profit?);
• The plan of distribution of the note (e.g. is the product being marketed as an
investment?);
• The expectation of the creditor/investor (e.g. would the investing public

reasonably expect the application of the securities laws to the product); and
• The presence of an alternative regulation (e.g. will the product be registered as

a banking product and the offered registered as a bank?).
109. Applying the family resemblance test to Lend reveals the presence of a note. First,
Coinbase likened the Lend program to that of a savings account, where the Lend customer is
looking for a profitable investment and Coinbase is looking for investors. Second, Coinbase
marketed the Lend program as an investment. Third, investors would expect that securities
regulation applies. Fourth, Coinbase is not a bank, so their so-called savings account falls under
no other regulatory jurisdiction and protection.
110. Given the clear facts of the case, Coinbase decided to cancel the Lend program. 62
VI. FTX’s offer and sale of YBAs, which are unregistered securities.
111. Beginning in 2019, the FTX Entities began offering the YBAs to public investors
through its Earn program. Plaintiff and other similarly situated individuals invested in FTX’s
YBAs.
112. The details of the Earn program were listed on the FTX website. 63 Under the section
titled “How can I earn yield on my FTX deposits?” on the FTX website, the company describes
the Earn program as follows:
You can now earn yield on your crypto purchases and deposits, as
well as your fiat balances, in your FTX app! By opting in and
62
Coinbase cancels Lend program launch after SEC fight - The Verge (accessed March 15, 2023).
63
FTX App Earn – FTX Exchange (accessed March 15, 2023).
38
participating in staking your supported assets in your FTX account,

you’ll be eligible to earn up to 8% APY on your assets. 64
113. On the same webpage, the company also states:
The first $10,000 USD value in your deposit wallets will

earn 8% APY. Amounts held above $10,000 up to $100,000 USD
in value (subject to market fluctuations) will earn 5% APY. 65
114. Nowhere on the website does FTX describe how this yield will be generated;
readers are given the impression that the yield will come from “staking your supported assets in
your FTX account” although nowhere does the company describe what staking actually is.
115. Staking is a technical concept that applies to the blockchain consensus mechanism
called Proof of Stake, which some cryptocurrencies utilize. 66 Staking serves a similar function to
cryptocurrency mining, in that it is the process by which a network participant gets selected to add
the latest batch of transactions to the blockchain and earn some crypto in exchange. While the
exact mechanism will vary from project to project, in general, users will put their token on the line
(i.e., “stake”) for a chance to add a new block onto the blockchain in exchange for a reward. Their
staked tokens act as a guarantee of the legitimacy of any new transaction they add to the
blockchain. The network chooses validators based on the size of their stake and the length of time
they’ve held it. Thus, the most invested participants are rewarded. If transactions in a new block
are discovered to be invalid, users can have a certain amount of their stake burned by the network,
in what is known as a slashing event. 67
64
65
Id.
66
For example, Ethereum, Tezos, Cosmos, Solana, and Cardano all use Proof of Stake.
67
The staking definition comes from the Coinbase website: What is staking? | Coinbase (accessed
March 15, 2023).
39
116. Some within the crypto community argue that staking is not a security because it is
simply part of the code by which specific cryptocurrencies operate. In other words, some argue
that staking programs are different from lending programs because user assets are not actually
being “lent” out to third parties. But in September 2022, SEC Chairman Gary Gensler told
reporters that “cryptocurrencies and intermediaries that allow holders to ‘stake’ their coins might
pass” the Howey Test. 68 According to Gensler, “From the coin’s perspective…that’s another
indicia that under the Howey test, the investing public is anticipating profits based on the efforts
of others.” The Wall Street Journal noted that if an intermediary such as a crypto exchange offers
staking services to its customers, Mr. Gensler said, it “looks very similar—with some changes of
labeling—to lending.” 69
117. Applying Howey to the FTX Earn program reveals that Earn is an investment
contract. An investment contract is present because users are clearly entrusting their funds to FTX.
FTX is deploying customer assets in a discretionary manner. Therefore, the efforts of FTX are
instrumental in generating the users’ yield and of course users have an expectation of profit
because FTX is advertising yields of up to 8% APY.
118. From a securities perspective, the Howey Test defines an investment contract if it
is (1) an investment of money; (2) in a common enterprise; (3) with a reasonable expectation of
profits to be derived from the entrepreneurial or managerial efforts of others.
119. Plaintiffs here invested money. Plaintiffs’ investment of assets, even if such
investments were in the form of cryptocurrencies, satisfy the “investment of money” prong for an
investment contract.
68
Ether’s New ‘Staking’ Model Could Draw SEC Attention - WSJ (accessed March 15, 2023).
69
Id.
40
120. Plaintiffs here invested in a common enterprise. FTX promoted and paid for
advertisements which touted earning up to 8% “yield” on any fiat or crypto held in a YBA, along
with representations that customers are eligible to earn the “yield,” on an hourly basis, simply by
passively keeping the funds in the YBA. FTX also made the same YBAs available to all FTX
customers, and all assets held in the account, whether crypto or fiat, earned the same rate of
interest. Once investors logged into their YBAs, the earn capability was automatically enabled,
and they passively earned yield. FTX has admitted that these earn “[s]ervices are provided by FTX
for its customers,” that FTX “transmits value from your [YBA]” and those “assets will be used to
generate a fixed yield for the user.” FTX’s Terms of Service further make clear that investor funds
are pooled together and used for lending and investment activities that would generate the yield,
i.e., “Your balances in your [YBA] are not segregated and cryptocurrency or cash are held in
shared addresses or accounts, as applicable.” The blockchains data contains an immutable and
verifiable record of data that shows that FTX customer deposits went into accounts operated by a
common enterprise, namely, FTX.
121. Plaintiffs here invested with the expectation of profit from the efforts of others.
FTX customers clearly had an expectation of profit, as they were guaranteed to earn up to 8%
“yield” for any fiat or crypto held in a YBA. FTX represented that customers are eligible to earn
the “yield,” which is rewarded hourly simply by passively keeping the funds in the YBA.
Moreover, Plaintiffs expected that they would earn these yield profits primarily, if not solely, from
FTX’s efforts in managing the assets invested into the YBAs, and not through their own efforts.
Indeed, the assets were not actually “in” Plaintiffs’ YBAs at all and were instead pooled with all
other FTX customer assets, as explained in the FTX’s Terms of Service, i.e., “Your balances in
your [YBA] are not segregated and cryptocurrency or cash are held in shared addresses or
accounts, as applicable.” The yield was generated entirely through FTX’s efforts from either
41
staking assets from the pooled account or otherwise lending assets, most notably to Alameda., FTX
freely admits that the yield was earned entirely through FTX’s efforts, as they admit that the Earn
“Services are provided by FTX for its customers,” that FTX “transmits value from your [YBA]”
and those “assets will be used to generate a fixed yield for the user. 70
122. In addition, the FTX Yield-bearing account was portrayed as passive income
stream. A customer needs to do nothing more than ensure they are subscribed to the yield program,
and that they have deposited assets (of crypto or even fiat) in order to earn the 5% or 8% yield,
which they clearly indicate is counted hourly. There is no further work or action needed on the
part of the user. The work that ‘others’ (namely FTX) would need to do would including, at a
baseline, sending transactions. But it would also require FTX to make an effort by leveraging and
investing the money elsewhere which could theoretically come about either via giving out loans,
employing trading strategies, ‘staking,’ making other investments, or giving out loans to entities
(such as Alameda) that would employ such strategies. The primary strategy that FTX portrayed to
investors was “staking,” as discussed herein.
123. The FTX Earn program was a note under Reves as well. First, FTX offered Earn to
obtain crypto assets for the general use of its business, namely, to run its activities to pay interest
to Earn investors, and users purchased YBAs and were automatically opted-in to Earn to receive
interest on their crypto assets. Second, Earn was offered and sold to a broad segment of the general
public. Third, FTX promoted Earn as an investment; on their website, FTX notes that Earn users
will receive “yield earnings” on their “investment portfolio.” 71 Fourth, no alternative regulatory
70
https://help.ftx.com/hc/en-us/articles/10573545824532-FTX-App-Earn (accessed March 15,
2023).
71
42
scheme or other risk reducing factors exist with respect to Earn. Note that the above analysis
mirrors that provided by the SEC in their BlockFi order. 72
124. On October 14, 2022, Director of Enforcement of the Texas State Securities Board,
Joseph Rotunda, filed a declaration in the Chapter 11 bankruptcy proceedings pending in
connection with the collapse of the Voyager Digital cryptocurrency exchange, In re: Voyager
Digital Holdings, Inc., et al., Case No. 22-10943 (MEW), ECF No. 536 (Bankr. S.D.N.Y. Oct. 14,
2022), in which he explained how the YBAs are in fact “an offering of unregistered securities in
the form of yield-bearing accounts to the residents of the United States.” Id., at 6. In his declaration,
the pertinent portions of which are reproduced in full for ease of reference, Rotunda explains:
I am also familiar with FTX Trading LTD (“FTX Trading”) dba FTX as
described herein. As more fully explained throughout this declaration, I am
aware that FTX Trading, along with West Realm Shires Services Inc. dba FTX
US (“FTX US”), may be offering unregistered securities in the form of yield-
bearing accounts to residents of the United States. These products appear similar
to the yield-bearing depository accounts offered by Voyager Digital LTD et al.,
and the Enforcement Division is now investigating FTX Trading, FTX US, and
their principals, including Sam Bankman-Fried.
I understand that FTX Trading is incorporated in Antigua and Barbuda and

headquartered in the Bahamas. It was organized and founded in part by Mr.
Bankman-Fried, and FTX Trading appears to be restricting operations in the
United States. For example, domestic users accessing the webpage for FTX
Trading at ftx.com are presented with a pop-up window that contains a
disclaimer that reads in part as follows:
Did you mean to go to FTX US? FTX US is a US licensed
cryptocurrency exchange that welcomes American users.
You’re accessing FTX from the United States. You won’t be able to
use any of FTX.com’s services, though you’re welcome to look
around the site.
FTX US claims to be regulated as a Money Services Business with FinCEN (No.
31000195443783) and as a money transmitter, a seller of payment instruments
and in other non-securities capacities in many different states. It is not, however,
72
43
registered as a money transmitter or in any other capacity with the Texas

Department of Banking and it is not registered as a securities dealer with the
Texas State Securities Board.
FTX US owns 75 percent or more of the outstanding equity of FTX Capital

Markets (CRD No. 158816) (“FTX Capital”), a firm registered as a broker-
dealer with the United States Securities and Exchange Commission, the
Financial Industry Regulatory Authority Inc., and 53 state and territorial
securities regulators. FTX Capital’s registration as a dealer in Texas became
effective on May 7, 2012, and the registration continues to remain in force and
effect.
FTX US maintains a website at https://ftx.us that contains a webpage for

smartphone applications for FTX (formerly Blockfolio) 73 (the “FTX Trading
App”) and FTX US Pro. Users appear able to click a link in this webpage to
download the FTX Trading App even when they reside in the United States.
On October 14, 2022, I downloaded and installed the FTX Trading App on my
smartphone. I created an account with FTX Trading through the FTX Trading
App and linked the FTX account to an existing personal bank account. During
the process, I provided my full first and last name and entered my residential
address in Austin, Texas. I also accessed hyperlinks in the FTX Trading App
that redirected to the Privacy Policy and Terms of Service. Although I was from
the United States and was using the application tied to FTX Trading, the Privacy
Policy and Terms of Service were from FTX US - not FTX Trading.
I thereafter used the FTX Trading App to initiate the transfer of $50.00 from my
bank account to the FTX account and then transferred .1 ETH from a 3.0 wallet
to the FTX account. The transfer of funds from my bank account to the FTX
account will take up to six days to complete but the transfer of ETH was
processed within a few minutes.
The FTX Trading App showed that I was eligible to earn a yield on my deposits.
It also explained the “Earn program is provided by FTX.US” – not FTX Trading.
It also represented that “FTX Earn rewards are available for US users on a
promotional basis.”
I recall the FTX Trading App’s default settings were automatically configured
to enable the earning of yield. The application also contained a link for additional
73
Based upon information and belief, FTX Trading acquired Blockfolio LLC (“Blockfolio”) in or
around August 2020. At the time, Blockfolio managed a cryptocurrency application. FTX Trading
appears to have thereafter rebranded Blockfolio and its smartphone application as FTX. Now, users
can download the FTX Trading App from Apple’s App Store or Google’s Google Play Store.
Although FTX rebranded Blockfolio, the application listing in Apple’s App Store still shows the
application with developed by Blockfolio.
44
information about yield. I accessed the link and was redirected to a recent article
published by “Blockfolio Rebecca” under help.blockfolio.com. The article
began as follows:
You can now earn yield on your crypto purchases and deposits, as
well as your fiat balances, in your FTX Trading App! By opting in
and participating in staking your supported assets in your FTX
account, you’ll be eligible to earn up to 8% APY on your staked
assets. THIS APY IS ESTIMATED AND NOT GUARANTEED
AS DESCRIBED BELOW.
The article also described the payment of yield. It contained a section titled How
do you calculate APY? Does my balance compound daily? that read, in part, as
follows:
FTX will deposit yield earnings from the staked coins, calculated
hourly, on the investment portfolio that is stored in your FTX
Trading App. Yield will be compounded on principal and yield you
have already earned. Any cryptocurrency that you have deposited
on FTX as well as any fiat balance you may have on your account,
will earn yield immediately after you have opted into the program.
The first $10,000 USD value in your deposit wallets will earn 8%
APY. Amounts held above $10,000 up to $10MM USD in value
(subject to market fluctuations) will earn 5% APY. In this scenario,
your yield earned on the coins will look something like the examples
below the table.
The article also contained a section titled Is this available in my country? This
section explained that “FTX Trading App Earn is available to FTX Trading App
customers that are in one of the FTX permitted jurisdictions.” It contained a
hyperlink to an article titled Location Restrictions published by FTX Crypto
Derivatives Exchange under help.ftx.com. This article described various
restrictions on operations in certain countries and locations and read in part as
follows:
FTX does not onboard or provide services to corporate accounts of
entities located in, established in, or a resident of the United States
of America, Cuba, Crimea and Sevastopol, Luhansk People’s
Republic, Donetsk People’s Republic, Iran, Afghanistan, Syria,
or North Korea. FTX also does not onboard corporate accounts
located in or a resident of Antigua or Barbuda. FTX also does not
onboard any users from Ontario, and FTX does not permit non-
professional investors from Hong Kong purchasing certain
products.
FTX does not onboard or provide services to personal accounts
of current residents of the United States of America, Cuba,
Crimea and Sevastopol, Luhansk People’s Republic, Donetsk
45
People’s Republic, Iran, Afghanistan, Syria, North Korea, or

Antigua and Barbuda. There may be partial restrictions in other
jurisdictions, potentially including Hong Kong, Thailand, Malaysia,
India and Canada. In addition, FTX does not onboard any users from
Ontario, does not permit non-professional investors from Hong
Kong purchasing certain products, and does not offer derivatives
products to users from Brazil. FTX serves all Japanese residents via
FTX Japan.
(emphasis in original)
Despite the fact I identified myself by name and address, the FTX Trading App
now shows that I am earning yield on the ETH. The yield is valued at 8 percent
APR.
Based upon my earning of yield and an ongoing investigation by the

Enforcement Division of the Texas State Securities Board, the yield program
appears to be an investment contract, evidence of indebtedness and note, and as
such appears to be regulated as a security in Texas as provided by Section
4001.068 of the Texas Securities Act. At all times material to the opening of this
FTX account, FTX Trading and FTX US have not been registered to offer or sell
securities in Texas. FTX Trading and FTX US may therefore be violating
Section 4004.051 of the Texas Securities Act. Moreover, the yield program
described herein has not been registered or permitted for sale in Texas as
generally required by Section 4003.001 of the Securities Act, and as such FTX
Trading and FTX US may be violation Section 4003.001 by offering
unregistered or unpermitted securities for sale in Texas. Finally, FTX Trading
and FTX US may not be fully disclosing all known material facts to clients prior
to opening accounts and earning yield, thereby possibly engaging in fraud and/or
making offers containing statements that are materially misleading or otherwise
likely to deceive the public. Certain principals of FTX Trading and FTX US may
also be violating these statutes and disclosure requirements. Further
investigation is necessary to conclude whether FTX Trading, FTX US and others
are violating the Securities Act through the acts and practices described in this
declaration.
The Enforcement Division of the Texas State Securities Board understands that
FTX US placed the highest bid for assets of Voyager Digital LTD et al., a family
of companies variously accused of misconduct in connection with the sale of
securities similar to the yield program promoted by FTX Trading and FTX US.
FTX US is managed by Sam Bankman-Fried (CEO and Founder), Gary Wang
(CTO and Founder) and Nishad Singh (Head of Engineering). The same
principals hold the same positions at FTX Trading, and I was able to access the
yield-earning product after following a link to the FTX Trading App from FTX
US’s website. The FTX Trading App also indicated the Earn program is
provided by FTX US. As such, FTX US should not be permitted to purchase the
46
assets of the debtor unless or until the Securities Commissioner has an

opportunity to determine whether FTX US is complying with the law and related
and/or affiliated companies, including companies commonly controlled by the
same management, are complying with the law.
I hereby authorize the Texas Attorney General’s Office and any of its
representatives to use this declaration in this bankruptcy proceeding.
I declare under penalty of perjury that the foregoing is true and correct.
Executed on October 14, 2022 in Austin, Texas.

/s Joseph Jason Rotunda
By: Joseph Jason Rotunda
VII. FTT Token
125. The FTT token that contributed to FTX’s demise is also an investment contract per
the Howey Test. FTT is an exchange token created by FTX that entitles holders to benefits on the
FTX exchange. According to crypto news site CoinDesk, “such benefits often include trading fee
discounts, rebates and early access to token sales held on the platform.” 74 Exchange tokens can be
very profitable for their issuers because the exchanges that issue them tend to keep a significant
number of tokens for themselves, which they can pump in price through speeches, social media
posts, and other announcements. Economically, exchange tokes are akin to equity, although the
holders of exchange tokens have no legal rights or interests in the issuer. As the exchange issuer
grows in size and prominence, and trading volume increases on the exchange, the value of the
exchange token will likely increase. Thus, the value of FTT increased as the FTX exchange became
more well-known and utilized. 75
126. FTT meets the Howey Test because the token was controlled by FTX; the company
could create or destroy FTT at will. And the value of FTT was based upon the success of FTX,
74
https://www.coindesk.com/learn/what-is-an-exchange-token/ (accessed March 15, 2023).
75
See FTT price history here: https://coinmarketcap.com/currencies/ftx-token/ (accessed March
15, 2023).
47
therefore the “efforts” of others prong of the Howey Test is met. It is also clear that investors
bought FTT because they thought it would go up in price; this is the same reason why most, if not
all, investors buy any given cryptocurrency. In fact, Binance CEO Changpeng “CZ” Zhao agreed
to accept FTT tokens as part of FTX’s buyout of Binance’s equity stake in FTX. 76 Exchange tokens
like FTT also functionally resemble the XRP token, which the SEC alleges is an investment
contract due to Ripple’s control over the XRP token. 77
VIII. The FTX Platform
127. Another avenue through which FTX users were exposed to a securities transaction
was through the basic structure of the platform. Despite cryptocurrency and blockchain’s
foundational premise being the ability to transmit value peer-to-peer using a trustless and
decentralized database that cannot be censured by any third party, cryptocurrency exchanges
operate more like traditional banks. When you buy Bitcoin through a centralized cryptocurrency
exchange, there is no corresponding transaction to the Bitcoin blockchain. Rather, the exchange
simply maintains its own database that indicates which cryptocurrencies it owes to its customers.
This is similar to how banks operate. Money deposited in a checking account is not actually “ours.”
The money becomes the bank’s and we are owed a debt by the bank which is governed by the
terms and conditions of the account. Cryptocurrency exchanges should then be in custody of
enough cryptocurrency on the blockchain to cover what it owes customers. Custody can be done
using hot or cold digital wallets (hot wallets are connected to the internet, cold wallets are not)
with best practice being for exchanges to hold the majority of cryptocurrency (crypto which they
are holding on behalf of customers) in multiple cold wallets. Best practice would also dictate that
76
https://www.investors.com/news/binance-to-buy-ftx-international-operations-as-liquidity-
crunch-sparks-crypto-selloff/ (accessed March 15, 2023).
77
48
exchanges hold customer assets in separate wallets from exchange assets, and that each customer’s
assets would be held in a distinct wallet.
128. FTX kept its crypto in a common pool used to fund undisclosed and unreasonably
risky investments.
The FTX Group did not keep appropriate books and records, or security controls,
with respect to its digital assets. Mr. Bankman-Fried and [Alameda co-founder
Gary] Wang controlled access to digital assets of the main businesses in the FTX
Group (with the exception of LedgerX, regulated by the CFTC, and certain other
regulated and/or licensed subsidiaries). Unacceptable management practices
included the use of an unsecured group email account as the root user to access
confidential private keys and critically sensitive data for the FTX Group companies
around the world, the absence of daily reconciliation of positions on the blockchain,
the use of software to conceal the misuse of customer funds, the secret exemption
of Alameda from certain aspects of FTX.com’s auto-liquidation protocol, and the
absence of independent governance as between Alameda (owned 90% by Mr.
Bankman-Fried and 10% by Mr. Wang) and the Dotcom Silo (in which third parties
had invested).
The Debtors have located and secured only a fraction of the digital assets of the
FTX Group that they hope to recover in these Chapter 11 Cases. The Debtors have
secured in new cold wallets approximately $740 million of cryptocurrency that the
Debtors believe is attributable to either the WRS, Alameda and/or Dotcom Silos.
The Debtors have not yet been able to determine how much of this cryptocurrency
is allocable to each Silo, or even if such an allocation can be determined. These
balances exclude cryptocurrency not currently under the Debtors’ control as a result
of (a) at least $372 million of unauthorized transfers initiated on the Petition Date,
during which time the Debtors immediately began moving cryptocurrency into cold
storage to mitigate the risk to the remaining cryptocurrency that was accessible at
the time, (b) the dilutive ‘minting’ of approximately $300 million in FTT tokens by
an unauthorized source after the Petition Date and (c) the failure of the co-founders
and potentially others to identify additional wallets believed to contain Debtor
assets. 78
129. In the declaration, Mr. Ray presents several rough balance sheets for the various
FTX silos, while noting that he does not have confidence in them, and that “the information therein
may not be correct as of the date stated.” 79 Most telling is a footnote that appears on the balance
78
042020648197.pdf (pacer-documents.s3.amazonaws.com) (accessed March 15, 2023).
79
Id.
49
sheets for the exchange businesses: “Customer custodial fund assets are comprised of fiat customer
deposit balances. Balances of customer crypto assets deposited are not presented.” 80 Ray notes that
U.S. and overseas exchanges “may have significant liabilities” but that “such liabilities are not
reflected in the financial statements prepared while these companies were under the control of Mr.
Bankman-Fried.” 81
130. To further complicate matters, recent statements given by Sam Bankman-Fried to
the Wall Street Journal (WSJ) suggest that about half of the balance owed by Alameda to FTX
was from wire transfers that customers made to FTX via Alameda in the early days before FTX
had a bank account. 82 This money was intended to fund customers’ accounts at FTX. Bankman-
Fried claims some customers continued to use that route after FTX had a bank account and that
over time, “FTX customers deposited more than $5 billion in those Alameda accounts.” 83 The
WSJ acknowledged that these funds “could have been recorded in two places—both as FTX
customer funds and as part of Alameda’s trading positions” and that “such double-counting would
have created a huge hole in FTX’s and Alameda’s balance sheets, with assets that weren’t really
there.” 84
131. The relationship between FTX and Alameda was critical to the exchange’s eventual
collapse. After suffering large losses in the wake of several high profile crypto-firm failures in the
spring and summer of 2022 (Alameda most likely was exposed to crypto hedge fund Three Arrows
80
Id.
81
Id.
82
https://www.wsj.com/articles/ftx-founder-sam-bankman-fried-says-he-cant-account-for-
billions-sent-to-alameda-
11670107659?st=g35ia0eu0bjwqzn&reflink=desktopwebshare_permalink (accessed March 15,
2023).
83
FTX customers deposited more than $5 billion in those Alameda accounts.
84
Id.
50
Capital), FTX.com lent out some of its customer assets that it did control to Alameda.85
Presumably, the exchange benefitted from the interest paid by Alameda for the loaned cryptoassets
– although some have suggested that the loans were made for free. 86 Alameda could then use the
customer assets as cheap collateral for margined trades with other parties (obtaining collateral from
other sources would have been much more expensive). 87 It appears that Alameda did post collateral
to secure the loans of customer crypto assets that it received, but that collateral took the form of
FTT tokens. FTT tokens were the so-called “native token” of the FTX exchange: FTX created FTT
and issued it to both institutional and retail investors without registering with any regulator or
undergoing any audit or other external due diligence. FTX could create unlimited amounts of FTT
if it wished.
132. In short, there appear to have been two sets of leveraged transactions involved.
First, Alameda borrowed assets from FTX’s customers, providing FTT tokens as collateral for
those loans. Second, Alameda engaged in margin trading, essentially borrowing money to execute
risky trading strategies: these trades were secured by the assets Alameda had borrowed from FTX
customers’ accounts. Leverage makes trades potentially more lucrative, but also makes them more
vulnerable to adverse market movements. In an Alameda balance sheet linked to CoinDesk in early
November, Alameda’s largest asset holdings were listed as being FTT tokens (it is possible that it
received these in a kind of bailout from FTX). Other assets listed on that balance sheet included
SOL tokens (issued by the Solana blockchain, in which Sam Bankman-Fried was an early investor)
85
https://newsletter.mollywhite.net/p/the-ftx-collapse-the-latest-revelations (accessed March 15,
2023).
86
https://www.cnbc.com/2022/11/13/sam-bankman-frieds-alameda-quietly-used-ftx-customer-
funds-without-raising-alarm-bells-say-sources.html (accessed March 15, 2023).
87
For a more general discussion of the conflicts of interest inherent in these relationships, see
https://www.coppolacomment.com/2022/11/the-ftx-alameda-nexus.html (accessed March 15,
2023).
51
and SRM tokens (issued by the Serum exchange that Sam Bankman-Fried co-founded). 88 Alameda
had few assets that hadn’t been created out of thin air by FTX or FTX-related entities.
133. After the CoinDesk report came out on November 2, 2022, the CEO of FTX’s rival
exchange Binance, Changpeng Zhao, tweeted that Binance was planning to sell off its holdings of
FTT. This triggered panic selling of FTT and a run on FTX, thereby ensuring the firm’s swift
demise.
134. While we are still learning exactly what happened at FTX and Alameda in the days
and months before their collapse, we do know several pieces of information that are relevant to
this litigation.
135. First, it is quite possible that fiat currency FTX customers sent to the exchange for
the purpose of purchasing cryptocurrency may never have actually resulted in a cryptocurrency
transaction. Instead, Alameda may have used those funds to purchase any number of assets,
including investing in venture capital firms (Alameda’s balance sheet in John Ray’s first day
declaration list venture capital assets).
136. Second, when customers withdrew cryptoassets from FTX in the past, FTX was
likely meeting these withdrawals by selling FTT. However, as the price of FTT fell in the wake of
Zhao’s tweet, it became increasingly expensive for FTX to convert FTT into other cryptoassets
that matched customers’ expectations of their portfolio holding – especially as so many FTX
customers were seeking to pull their crypto assets out of the exchange at the same time. Therefore,
while customers may have believed they were buying cryptocurrencies that were not securities
(i.e., commodities) the economic reality was that they were directly, or indirectly, buying securities
in the form of venture capital investments, FTT, SOL, and/or SRM. Another way to think of it is
88
52
that FTX and all its affiliated entities were essentially economically akin to a venture capital fund,
where “investors,” in the form of customers, sent funds to the firm and the firm then did whatever
it wanted with these funds, including purchasing securities. Given these facts, it appears that any
person who used FTX was engaged in a securities transaction of some kind, knowingly or
unknowingly.
137. Thus, as will be illustrated below, the FTX Brand Ambassadors’ promotion of
“FTX” was necessarily the promotion of unregistered securities.
IX. The Defendants Aggressively Marketed the FTX Platform
138. From its inception, cryptocurrency has been fueled by illicit activity and the crypto
sector continues to be rife with crime, frauds and scams.” 89 Everyday consumers have also fallen
victim to various cryptocurrency-related scams. 90
139. There is also a long history of consumer losses associated with centralized
exchanges, FTX being the latest.
140. All the above-mentioned problems with cryptocurrency are well known and one of
the big reasons why consumers are hesitant to purchase or use cryptocurrency. According to Pew
Research, 16% of Americans have invested in cryptocurrency while another 71% are not invested
89
https://www.justice.gov/opa/pr/justice-department-announces-report-digital-assets-and-
launches-nationwide-network (accessed March 15, 2023). Virtual Currencies: Additional
Information Could Improve Federal Agency Efforts to Counter Human and Drug Trafficking
[Reissued with Revisions Feb. 7, 2022] | U.S. GAO (accessed March 15, 2023)’ Russia Could Use
Cryptocurrency to Mitigate U.S. Sanctions - The New York Times (nytimes.com) (accessed March
15, 2023), Iran Plans Uses Crypto for Imports to Get Around Sanctions (gizmodo.com) (accessed
March 15, 2023), This is how North Korea uses cutting-edge crypto money laundering to steal
millions | MIT Technology Review(accessed March 15, 2023).
90
See Justice Department Announces Report on Digital Assets and Launches Nationwide Network
| OPA | Department of Justice (accessed March 15, 2023); Crypto-Assets: Implications for
Consumers, Investors, and Businesses (treasury.gov) (accessed March 15, 2023).
53
although they have heard at least a little about cryptocurrency. 91 For those in the latter group,
concerns around fraud and scams are likely playing a role in their resistance to crypto investing.
141. Crypto firms like FTX turned to celebrity and social media endorsers to position
itself as the “safe” option among cryptocurrency exchanges. The FTX advertising campaign is
particularly pernicious because it implicitly acknowledges cryptocurrency’s problems while
holding FTX out as the “safe” place to invest in cryptocurrency, which were proven untrue, as
FTX turned out to be a house of cards that misappropriated customer assets.
142. FTX’s paid endorser program was clearly designed to use the positive reputation
associated with specific YouTube and other social network influencers to convince consumers that
FTX was a safe place to buy and sell cryptocurrency. As Mr. Sibenik explains, FTX’s brand
ambassadors had a critical role in portraying FTX as being ‘safe’ and ‘compliant.’ Ex. A ¶ 44–49.
143. FTX not only deployed such well-known celebrities such as Stephen Curry, Kevin
O’Leary as brand ambassadors, id., but it also engaged in aggressive global digital marketing,
particularly through influencer “crypto marketing” on YouTube and other social networks.
144. “Crypto marketing” is the execution of marketing and advertising efforts with the
goal of raising awareness, acquiring users, or driving growth for a cryptocurrency or blockchain-
related product. Popular crypto marketing strategies include influencer marketing, community
growth, social media management, and grassroots digital marketing, and tout great results and
valuable case studies, specifically with promoting cryptocurrency. 92
145. Social media “influencers” are individuals who have amassed a large following on
platforms such as Instagram, YouTube, and TikTok, and use their influence to promote products,
91
46% of cryptocurrency investors in US say it did worse than expected | Pew Research Center
(last accessed March 15, 2023).
92
Ultimate Cryptocurrency Marketing Strategy Guide for 2022 | Coinbound (last accessed March
15, 2023).
54
services, and ideas. Social media influencers are characterized by a huge number of highly loyal
and engaged social media followers, who share a rapport with their fans and are perceived as
everyday people who are experts in their niches.
146. Unlike mainstream celebrities, influencers don’t shroud their lives in an air of
mystery and present themselves as real-life consumers who share authentic and valuable
information with their followers. 93 They create content that resonates with their followers, often
by sharing their personal experiences, lifestyle choices, and preferences. By doing so, they
establish a sense of authenticity and relatability with their audience, which can be incredibly
compelling.
147. Influencer marketing thus involves collaborating with a social media influencer to
increase brand visibility and strengthen a brand’s reputation. When executed correctly, it helps
win more customers from target audiences and earn more revenue. What differentiates influencer
marketing from other types of celebrity marketing is that it is perceived as more authentic and
trustworthy, because, owing to an influencer’s rapport with their fans, their recommendations
aren’t dismissed as fake and sponsored endorsements. Id. Instead, their followers often swear by
the recommendations made by their favorite influencer. Id. Because their audience trusts them,
they are more likely to take their recommendations, which can lead to increased sales for the
products they promote.
148. While influencer digital marketing is more expensive than other types of paid
media, studies done on the subject show that the majority of marketing teams have found the return
of investment (“ROI”) on influencer marketing to be higher than that of other forms of online
93
The Rise of Influencer Marketing: All You Need to Know | Shane Barker (last accessed March
15, 2023).
55
growth tactics. 94 According to a recent study, influencer marketing delivers an ROI of $6.5 for
every $1 spent. This is far higher than the ROI of other forms of digital marketing. 95 Digital content
creators also can more precisely target their marketing efforts by using highly sophisticated
analytic tools such as Google Analytics to measure their site’s traffic, where its coming from, and
who is visiting their sites. 96
149. As such, digital marketing through social media is extremely effective at
influencing consumer decisions. According to a survey from the National Association of
Professional Financial Advisors (NAPFA), more than one-quarter of Gen Zers learn about finance
from social media. The survey results also show that more than one-third (39%) of Americans
under 65 receive their financial advice from social media. 97 When it comes to where they are
getting financial advice, YouTube is one the most popular platforms for Gen Z (63%) and
Millenials (71%) to discuss financial planning and investment in cryptocurrency. 98 More than 60%
of the respondents who received their information online say they have acted on that advice. 99
94
Everything You Need to Know About Crypto Influencer Marketing (coinbound.io) (last
accessed March 15, 2023).
95
Id; The Rise of Influencer Marketing: All You Need to Know | Shane Barker (last accessed
March 15, 2023).
96
Ultimate Cryptocurrency Marketing Strategy Guide for 2022 | Coinbound (last accessed March
15, 2023).
97
https://www.napfa.org/social-media-survey (last accessed March 15, 2023).
; http://s3.napfa.cql-
aws.com.s3.amazonaws.com/files/Consumer/NAPFA%20Fall%202021%20Full%20Report.pdf
98
https://www.thebalancemoney.com/8-personal-finance-influencers-you-should-know-6544780
(last accessed March 15, 2023).
; https://www.napfa.org/social-media-survey (last accessed March 15, 2023).
99
Id.
56
150. YouTube, which allows for long-form video content which can exist in perpetuity,
is one of the most effective social media channels for targeting cryptocurrency audiences and has
found its way into the daily routine of millions of cryptocurrency enthusiasts worldwide. 100
151. Many of the most famous finance and money social media influencers collaborated
with FTX, working under the umbrella of Defendant, Creators Agency, a talent management for
digital creators. Creators Agency touts its expansive reach, claiming to have reached “millions,”
including 2.94B+ YouTube views and 27M+ YouTube Subscribers. Though not all Creative
Agency clients endorsed FTX, many of the talent it manages – including certain of the Defendants
– netted hundreds of thousands, if not millions of dollars from signed contracts procured and/or
facilitated by the agency.
152. For their part, the Defendants, Kevin Paffrath, Graham Stephan, and Tom Nash,
who prior to FTX’s collapse promoted FTX as a safe investment to their legions of followers, have
now scrubbed their YouTube channels of all video clips endorsing FTX and praising Sam
Bankman-Fried. In their place, the YouTube Influencers have substituted mea culpas and apology
videos acknowledging their significant role in promoting FTX and causing billions of dollars of
investor losses. 101
100
Everything You Need to Know About Crypto Influencer Marketing (coinbound.io) (last
accessed March 15, 2023).
101
https://markets.businessinsider.com/news/stocks/personal-finance-influencers-sponsored-by-
ftx-say-sorry-to-fans-2022-11 (last accessed March 15, 2023);
https://www.marketwatch.com/story/my-bad-the-youtube-financial-influencer-network-paid-to-
pump-ftx-11669066275 (last accessed March 15, 2023); https://www.yahoo.com/now/social-
media-influencers-fed-bankman-
150327348.html?guccounter=1&guce_referrer=aHR0cHM6Ly93d3cuZ29vZ2xlLmNvbS8&guc
e_referrer_sig=AQAAAFrNFPdXzgk_rsYJLmGipe0izPCSeyp9dftZXdh3UKccPhgIT5hGLIBUr
4EomSeyDd8qFMKHI2U6E-
SjCbOo3Z95op0l0nkbEJQI8zAioDqWsrUB20ugMHs7VihR81OwoUOwlbB9vCuN1IhofQkBji
MacwXy6b3F7ASrvOGN3pgb (last accessed March 15, 2023);
57
153. For example, Defendant, Kevin Paffrath, who upon information and belief received
$2,500 every time he mentioned FTX in one of his videos, posted a video to his “Meet Kevin”
YouTube channel (with over 1.86 million subscribers) on November 22, 2022 in which he states:
“Yes, I used to be sponsored by FTX. I think that is a disgrace. And it’s a scar. And it sucks. If I
could go back I would change it, because people got hurt because of that. I feel so terribly about
that. People got hurt because of FTX and it’s a disgrace.” 102
154. Similarly, Defendant Graham Stephan had built a loyal fanbase on YouTube by
sharing financial advice. After aggressively promoting FTX, he posted a video titled “My response
to FTX” to his YouTube channel (with over 4.22 million subscribers) on November 28, 2022 in
which he states: “FTX US has been a recurring sponsor here on the channel since spring of this
year. . . . I can’t even begin to share how devastated and sorry I am. . . . I made the mistake of
working with a platform who operates within an industry that does not already have proper
consumer protections in place. . . [O]n the most basic level, I made the mistake of assuming that
Sam Bankman-Fried’s image had anything to do with his credibility. . . . I fell into his trap of
effective altruism.” 103
155. Defendant Tom Nash, who apparently posted a video following FTX’s bankruptcy
in which he claimed to only have worked with FTX US, which he falsely represented in the video
to be “100% operational, nothing is going on with FTX US,” has since taken down that video,
along with several other videos in which he gave full-throated endorsements of FTX.
102
https://www.youtube.com/watch?v=qpDeks14TMk (accessed March 15, 2023)
103
https://www.youtube.com/watch?v=jcy9PyMvNqc (accessed March 15, 2023)
58
156. Endorsements by the Defendants are even more dangerous, because of their broad
public reach. People are more likely to watch YouTube than network television. Micro-celebrities
and social media influencers thus can have outsized influence on their audience, particularly those
that espouse financial advice. FTX capitalized on this dynamic, and sponsored several of those
content creators, particularly on YouTube.
157. Other organizations and individuals, with presumably more to gain, did find red
flags at FTX and turned down FTX and/or Sam Bankman-Fried’s money. The nonprofits Our
World Data and MITRE declined offered gifts of $7.5 million and $485,000, respectively, from
the FTX Future Fund due to undisclosed red flags. 104 In addition, CME Group CEO Terry Duffy
allegedly told SBF that he was “an absolute fraud” upon having an initial conversation with him.105
Finally, after FTX’s implosion, the Financial Times reported that FTX held talks with Taylor Swift
to sponsor the singer’s tour for more than $100 million. 106 While the article does not detail the
reasons why Swift declined the FTX offer, it does include the following quote from a person close
to the negotiations:
Taylor would not, and did not, agree to an endorsement deal. The
discussion was around a potential tour sponsorship that did not
happen. 107
158. Based upon the information that has been released by FTX’s new CEO, John Ray
as part of the company’s bankruptcy filings, anyone who bothered to spend 20 minutes reviewing
104
https://www.moneyweb.co.za/moneyweb-crypto/sam-bankman-frieds-red-flags-were-seen-in-
all-corners-of-his-empire/ (accessed March 15, 2023).
105
https://www.cnbc.com/2022/11/23/absolute-fraud-cmes-terry-duffy-says-he-saw-trouble-
before-ftx-collapse-.html (accessed March 15, 2023).
106
FTX held talks with Taylor Swift over $100mn sponsorship deal | Financial Times (accessed
March 15, 2023).
107
Id.
59
FTX’s operations pre-collapse would have identified significant red flags. In his first day pleading
in support of FTX’s chapter 11 petitions, Mr. Ray noted:
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. 108
159. Mr. Ray’s pleading contains a number of troubling findings, among them: 1) FTX
did not have centralized control of its cash, 2) FTX had no dedicated human resources department,
which has hindered Mr. Ray’s team from preparing a complete list of who worked for the FTX
Entities, 3) A lack of disbursement controls that resulted in employees submitting payment
requests via on-line chat and these requests being approved by managers responding with
personalized emojis, 4) Corporate funds were used to purchase homes and personal items for
employees, and 5) A lack of books and records and the absence of lasting records of decision-
making.
160. It is hard to imagine that anyone who has done business with FTX, including paid
endorsers, would not have personally witnessed one or more of the deficiencies identified by Mr.
Ray. All FTX endorsers have extensive business dealings beyond FTX and surely would be able
to identify business practices that are unusually problematic.
161. Instead, tens of thousands of customers relied on the testimonials of paid endorsers
such as the Defendants who knew why they were being compensated. Indeed, the whole point
behind paying influencers to endorse a product is to increase sales. Thus, influencers have a moral
108
https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=&ved=2ahUKEwiokr
3C _-L7AhWsnGoFHRdBC2kQFnoECBAQAQ&url=https%3A%2F%2F2.gy-118.workers.dev/%3A443%2Fhttps%2Fpacer-
documents.s3.amazonaws.com%2F33%2F188450%2F042020648197.pdf&usg=AOvVaw38wQ
JwnmP5fFftiyYkNjSG (accessed March 15, 2023).
60
and legal obligation to know that what they are promoting is unlikely to cause physical or financial
damage to customers.
162. In addition to the conduct of SBF, as described in this Complaint, some of the
biggest names in sports and entertainment have either invested in FTX and/or been paid to serve
as brand ambassadors for the company. Several of them hyped FTX to their social media fans,
driving retail consumer adoption of the FTX Platform.
163. In April 2021, FTX became the first company in the crypto industry to name an
arena. This helped lend credibility and recognition to the FTX brand and gave the massive fanbase
of basketball exposure to the FTX Platform.
164. FTX’s explanation for using social media influencers -- micro-celebrities in their
own right -- and stars like Tom Brady and supermodel Gisele Bunchden was no secret: “We’re the
newcomers to the scene,” said then-FTX.US President Brett Harrison, referring to the crypto
services landscape in the U.S. “The company needs to familiarize consumers with its technology,
customer service and offerings, while competing with incumbents like Coinbase Global Inc. or
Kraken,” Mr. Harrison said. “We know that we had to embark on some kind of mass branding,
advertising, sponsorship type work in order to be able to do that,” he said. 109
165. In other words, the FTX Entities needed influencers like Defendants to continue
funneling investors into the FTX Ponzi scheme, and to promote and substantially assist in the sale
of the YBAs, which are unregistered securities.
109
https://www.wsj.com/articles/tom-brady-and-gisele-bundchen-to-star-in-20-million-
campaign-for-crypto-exchange-11631116800?mod=article_inline (accessed March 15, 2023).
61
CLASS ACTION ALLEGATIONS
166. As detailed below in the individual counts, Plaintiff brings this lawsuit on behalf of
himself and all others similarly situated, pursuant to Rule 23(a), (b)(2), (b)(3), and/or (c)(4) of the
Federal Rules of Civil Procedure.
I. Class Definitions
167. Plaintiffs seek to represent the following Global Class, Nationwide Class, and
Florida Subclass (collectively, the “Classes”):
(1) Global Class: All persons and entities residing outside of the
United States who, within the applicable limitations period,
purchased or enrolled in a YBA.
(2) Nationwide Class: All persons or entities in the United States
who, within the applicable limitations period, purchased or
enrolled in a YBA.
(3) Florida Subclass: All persons or entities in the state of Florida
who, within the applicable limitations period, purchased or
enrolled in a YBA.
Excluded from the Classes are Defendants and their officers, directors, affiliates, legal
representatives, and employees, the FTX Entities and their officers, directors, affiliates, legal
representatives, and employees, any governmental entities, any judge, justice, or judicial officer
presiding over this matter and the members of their immediate families and judicial staff.
168. Plaintiffs reserve the right to modify or amend the definition of the proposed
Classes, or to include additional classes or subclasses, before or after the Court determines whether
such certification is appropriate as discovery progresses. Plaintiffs seek certification of the Classes
in part because all offers of FTX YBAs to Plaintiffs and the Class Members (in which Defendants
62
each substantially participated) were made by FTX from their principal place of business in Miami,
Florida, through its interactive website and mobile app which were accessible to Florida residents
and were actually used to effect commercial transactions with customers in Florida, thus the sales
of FTX YBAs stem from a transactional occurrence that emanated from the State of Florida.
II. Numerosity
169. The Classes are comprised of thousands, if not millions, of consumers globally, to
whom FTX offered and/or sold YBAs. Moreover, thousands, if not millions, of consumers
worldwide have executed trades on the FTX Platform within the applicable limitations period.
Membership in the Classes are thus so numerous that joinder of all members is impracticable. The
precise number of class members is currently unknown to Plaintiffs but is easily identifiable
through other means, such as through FTX’s corporate records or self-identification.
III. Commonality/Predominance
170. This action involves common questions of law and fact, which predominate over
any questions affecting individual class members. These common legal and factual questions
include, but are not limited to, the following:
(a) whether the YBAs were unregistered securities under federal or Florida law;
(b) whether Defendants’ participation and/or actions in FTX’s offerings and sales of
YBAs violate the provisions of the Securities Act and Florida securities law.
(c) the type and measure of damages suffered by Plaintiffs and the Class.
(a) whether Defendants’ practices violate the FDUTPA;
(b) whether Plaintiffs and Class members have sustained monetary loss and the proper
measure of that loss;
(c) whether Plaintiffs and Class members are entitled to injunctive relief;
(d) whether Plaintiffs and Class members are entitled to declaratory relief; and
63
(e) whether Plaintiffs and Class members are entitled to consequential damages,
punitive damages, statutory damages, disgorgement, and/or other legal or equitable
appropriate remedies as a result of Defendants’ conduct.
IV. Typicality
171. Plaintiffs’ claims are typical of the claims of the members of the Classes because
all members were injured through the uniform misconduct described above, namely that Plaintiffs
and all class members were offered and/or sold FTX’s YBAs because of Defendants’ actions
and/or participation in the offering and sale of these unregistered securities, and Plaintiffs are
advancing the same claims and legal theories on behalf of themselves and all such members.
Further, there are no defenses available to any Defendant that are unique to Plaintiffs.
V. Adequacy of Representation
172. Plaintiffs will fairly and adequately protect the interests of the members of the
Class. Plaintiffs have retained counsel experienced in complex consumer class action litigation,
and Plaintiffs intend to prosecute this action vigorously. Plaintiffs have no adverse or antagonistic
interests to those of the Classes. Plaintiffs anticipate no difficulty in the management of this
litigation as a class action. To prosecute this case, Plaintiffs have chosen the undersigned law firms,
which have the financial and legal resources to meet the substantial costs and legal issues
associated with this type of consumer class litigation.
VI. Requirements of Fed. R. Civ. P. 23(b)(3)
173. The questions of law or fact common to Plaintiffs’ and each Class member’s claims
predominate over any questions of law or fact affecting only individual members of the Classes.
All claims by Plaintiffs and the unnamed members of the Classes are based on the common course
of conduct by Defendants (1) in marketing, offering, and/or selling the YBAs, which are
64
unregistered securities, and/or (2) in receiving secret undisclosed compensation for their
promotion of the FTX Platform.
174. Common issues predominate when, as here, liability can be determined on a class-
wide basis, even when there will be some individualized damages determinations.
175. As a result, when determining whether common questions predominate, courts
focus on the liability issue, and if the liability issue is common to the Classes as is in the case at
bar, common questions will be held to predominate over individual questions.
A. Superiority
176. A class action is superior to individual actions for the proposed Classes, in part
because of the non-exhaustive factors listed below:
(a) Joinder of all Class members would create extreme hardship and inconvenience for
the affected customers as they reside nationwide and throughout the state;
(b) Individual claims by Class members are impracticable because the costs to pursue
individual claims exceed the value of what any one Class member has at stake. As
a result, individual Class members have no interest in prosecuting and controlling
separate actions;
(c) There are no known individual Class members who are interested in individually
controlling the prosecution of separate actions;
(d) The interests of justice will be well served by resolving the common disputes of
potential Class members in one forum;
(e) Individual suits would not be cost effective or economically maintainable as
individual actions; and
(f) The action is manageable as a class action.
65
VII. Requirements of Fed. R. Civ. P. 23(b)(2)
177. Defendants have acted and refused to act on grounds generally applicable to the
Classes by engaging in a common course of conduct of aiding and abetting the offering and/or
selling the YBAs, which are unregistered securities, thereby making appropriate final injunctive
relief or declaratory relief with respect to the classes as a whole.
178. Defendants have acted and refused to act on grounds generally applicable to the
Classes by engaging in a common course of conduct of uniformly identical and uniform
misrepresentations and omissions in receiving secret undisclosed compensation for their
promotion of the FTX Platform, thereby making appropriate final injunctive relief or declaratory
relief with respect to the classes as a whole.
VIII. Requirements of Fed. R. Civ. P. 23(c)(4)
179. As it is clear that one of the predominant issues regarding Defendants’ liability is
whether the YBAs FTX offered and/or sold are unregistered securities, utilizing Rule 23(c)(4) to
certify the Class for a class wide adjudication on this issue would materially advance the
disposition of the litigation as a whole.
180. As it is clear that another predominant issue regarding Defendants’ liability is
whether they have violated the consumer protection and securities laws of Florida in making
identical and uniform misrepresentations and omissions regarding the functionality of the FTX
Platform, and/or in receiving secret undisclosed compensation for their promotion of the FTX
Platform, utilizing Rule 23(c)(4) to certify the Classes for a class wide adjudication on this issue
would materially advance the disposition of the litigation as a whole.
IX. Nature of Notice to the Proposed Class.
181. The names and addresses of all Class Members are contained in the business
records maintained by FTX and are readily available to FTX. The Class Members are readily and
66
objectively identifiable. Plaintiffs contemplate that notice will be provided to Class Members by
e-mail, mail, and published notice.
COUNT ONE
Violations of the Florida Statute Section 517.07,
The Florida Securities and Investor Protection Act
(Plaintiffs Individually and on behalf of the Classes)
182. Plaintiffs repeat and re-allege the allegations contained in paragraphs 1–181 above,
as if fully set forth herein.
183. Section 517.07(1), Fla. Stat., provides that it is unlawful and a violation for any
person to sell or offer to sell a security within the State of Florida unless the security is exempt
under Fla. Stat. § 517.051, is sold in a transaction exempt under Fla. Stat. § 517.061, is a federally
covered security, or is registered pursuant to Ch. 517, Fla. Stat.
184. Section 517.211 extends liability to any “director, officer, partner, or agent of or
for the seller, if the director, officer, partner, or agent has personally participated or aided in making
the sale, is jointly and severally liable to the purchaser in an action for rescission, if the purchaser
still owns the security, or for damages, if the purchaser has sold the security.”
185. The YBA is a security pursuant to Fla. Stat. § 517.021(22)(a).
186. The YBAs sold and offered for sale to Plaintiff and Class members were not:
a. exempt from registration under Fla. Stat. § 517.051;
b. a federal covered security;
c. registered with the Office of Financial Regulations (OFR); or
d. sold in a transaction exempt under Fla. Stat. § 517.061.
187. The FTX Entities sold and offered to sell the unregistered YBAs to Plaintiffs and
the members of the Class.
188. The Defendants are agents of the FTX Entities pursuant to Fla. Stat. § 517.211.
67
189. The FTX Entities, with the Defendants’ material assistance, offered and sold the
unregistered YBAs to Plaintiffs and the members of the Class. As a result of this assistance, the
Defendants violated Fla. Stat. § 517.07 et seq. and Plaintiffs and members of the Class sustained
damages as herein described.
COUNT TWO
For Violations of the Florida Deceptive and Unfair Trade Practices Act,
§ 501.201, Florida Statutes, et seq.
191. This cause of action is brought pursuant to the Florida Deceptive and Unfair Trade
Practices Act, section 501.201, Fla. Stat., et seq. (“FDUTPA”). The stated purpose of the FDUTPA
is to “protect the consuming public . . . from those who engage in unfair methods of competition,
or unconscionable, deceptive, or unfair acts or practices in the conduct of any trade or commerce.”
§ 501.202(2), Fla. Stat.
192. Plaintiffs and Class members are consumers as defined by section 501.203, Fla.
Stat. Defendants are engaged in trade or commerce within the meaning of the FDUTPA.
193. Florida Statute section 501.204(1) declares unlawful “[u]nfair methods of
competition, unconscionable acts or practices, and unfair or deceptive acts or practices in the
conduct of any trade or commerce.”
194. The Defendants’ unfair and deceptive practices as described herein were consumer-
oriented and are objectively materially likely to mislead – and have materially misled – consumers
acting reasonably in the circumstances.
195. The Defendants have violated the FDUTPA by engaging in the unfair and deceptive
practices as described herein, which offend public policies and are immoral, unethical,
unscrupulous and injurious to consumers.
68
196. Plaintiffs and consumers in the Classes have been aggrieved by the Defendants’
unfair and deceptive practices and acts of false advertising by paying into the Ponzi scheme that
was the FTX Platform and in the amount of their lost investments.
197. The harm suffered by Plaintiffs and consumers in the Classes was directly and
proximately caused by the deceptive and unfair practices of the Defendants, as more fully
described herein.
198. Pursuant to sections 501.211(2) and 501.2105, Fla. Stat., Plaintiffs and consumers
in the Classes make claims for actual damages, attorneys’ fees and costs.
199. The Defendants still utilize many of the deceptive acts and practices described
above. Plaintiffs and the other members of the Classes have suffered and will continue to suffer
irreparable harm if the Defendants continue to engage in such deceptive, unfair, and unreasonable
practices. Section 501.211(1) entitles Plaintiffs and the Classes to obtain both declaratory or
injunctive relief to put an end to the Defendants’ unfair and deceptive scheme.
COUNT THREE
Civil Conspiracy
201. The FTX Entities and the Defendants made numerous misrepresentations and
omissions to Plaintiffs and Class Members about the FTX Platform to induce confidence and to
drive consumers to invest in what was ultimately a Ponzi scheme, misleading customers and
customers with the false impression that any cryptocurrency assets held on the FTX Platform were
safe and were not being invested in unregistered securities.
69
202. The FTX Entities entered into one or more agreements with the Defendants with
the purpose of making these misrepresentations and/or omissions to induce Plaintiff and
consumers to invest in the YBAs and/or use the FTX Platform.
203. The Defendants engaged in unlawful acts with the FTX Entities, namely, the
misrepresentations and omissions made to Plaintiffs and the Classes and the sale of unregistered
securities.
204. The Defendants’ conspiracy substantially assisted or encouraged the wrongdoing
conducted by the FTX Entities; further, the Defendants had knowledge of such fraud and/or
wrongdoing, because of their experience and relationship with the FTX Entities, as described
above and as such, knew that the representations made to Plaintiffs were deceitful and fraudulent.
205. The Defendants’ conspiracy with the FTX Entities to commit fraud caused damages
to Plaintiffs and the Classes in the amount of their lost investments.
COUNT FOUR
Declaratory Judgment
(Declaratory Judgment Act, Florida Statutes §§ 86.011 et seq.)
206. Plaintiffs reallege and incorporate by reference the allegations contained in
paragraphs 1–181 as if fully set forth herein.
207. This Count is asserted against Defendants under Florida Statutes §§ 86.011, et seq.
208. There is a bona fide, actual, present and practical need for the declaratory relief
requested herein; the declaratory relief prayed for herein deal with a present, ascertained or
ascertainable state of facts and a present controversy as to a state of facts; contractual and statutory
duties and rights that are dependent upon the facts and the law applicable to the facts; the parties
have an actual, present, adverse and antagonistic interest in the subject matter; and the antagonistic
and adverse interests are all before the Court by proper process for final resolution.
70
209. Plaintiffs and the members of the Classes have an obvious and significant interest
in this lawsuit.
210. Plaintiffs and members of the Classes purchased YBAs, based in part on justifiable
reliance on the Defendants’ misrepresentations and omissions regarding the FTX Platform as
further described hereinabove.
211. If the true facts had been known, including but not limited to that the YBAs are
unregistered securities, the FTX Platform does not work as represented, and Defendants were paid
exorbitant sums of money to peddle FTX to the nation, Plaintiffs and the Classes would not have
purchased YBAs in the first place.
212. Thus, there is a justiciable controversy over whether the YBAs were sold illegally,
and whether the Defendants illegally solicited their purchases from Plaintiff and the Class.
213. Plaintiff and the Class seek an order declaring that the YBAs were securities that
the FTX Platform did not work as represented, and Defendants were paid exorbitant sums of
money to peddle FTX to the nation.
PRAYER FOR RELIEF
WHEREFORE, Plaintiffs pray for a judgment on behalf of themselves and the Classes:
a. Certifying the Class as requested herein;
b. Awarding actual, direct and compensatory damages;
c. Awarding restitution and disgorgement of revenues if warranted;
d. Awarding declaratory relief as permitted by law or equity, including declaring the
Defendants’ practices as set forth herein to be unlawful;
e. Awarding injunctive relief as permitted by law or equity, including enjoining the
Defendants from continuing those unlawful practices as set forth herein, and
71
directing the Defendants to identify, with Court supervision, victims of their
conduct and pay them all money they are required to pay;
f. Awarding statutory and multiple damages, as appropriate;
g. Awarding attorneys’ fees and costs; and
h. Providing such further relief as may be just and proper.
DEMAND FOR JURY TRIAL
Plaintiffs hereby demand a jury trial as to all claims so triable.
Dated: March 15, 2023 Respectfully submitted,
By: /s/ Adam Moskowitz

Adam M. Moskowitz
Florida Bar No. 984280
[email protected]
Joseph M. Kaye
[email protected]
THE MOSKOWITZ LAW FIRM, PLLC
2 Alhambra Plaza, Suite 601
Coral Gables, FL 33134
Telephone: (305) 740-1423
By: /s/Stuart Z. Grossman

Stuart Z. Grossman
Manuel A. Arteaga-Gomez
GROSSMAN ROTH YAFFA COHEN, P.A.
2525 Ponce de Leon Boulevard, Suite 1150
Coral Gables, FL 33134
Ph: 305-442-8666
Fx: 305-285-1668
[email protected]
[email protected]
72
By: /s/ Stephen Neal Zack

Stephen Neal Zack
Tyler Ulrich
BOIES SCHILLER FLEXNER LLP
100 SE 2nd St., Suite 2800
Miami, FL 33131
Office: 305-539-8400
[email protected]
[email protected]
By: /s/ Jose Ferrer

Jose Ferrer
Michelle Genet Bernstein
MARK MIGDAL HAYDEN LLP
8 SW 8th Street, Suite 1999
Miami, FL 33130
Office: 305-374-0440
[email protected]
[email protected]
[email protected]
Co-Counsel for Plaintiffs and the Class
73

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Case 1:23-cv-21023-CMA Document 1 Entered on FLSD Docket 03/15/2023 Page 1 of 73

UNITED STATES DISTRICT COURT

EDWIN GARRISON, et al., on behalf of

Plaintiffs, JURY TRIAL DEMANDED

KEVIN PAFFRATH, GRAHAM

CLASS ACTION COMPLAINT AND DEMAND FOR JURY TRIAL

have been stolen from investors across the globe.

2. FTX was a centralized cryptocurrency platform which specialized in derivatives

will be able to see any recovery from those proceedings.

adequate (if any) due diligence.

entire Alcohol & Beverages industry.

and/or the financial benefit of FTX.

of traditional news websites. 4

Arcaro v. Parks, 214 L. Ed. 2d 235 (2022).

platform as FTX imploded and filed a Chapter 11 bankruptcy petition in Delaware on an

relating to FTX’s scheme to defraud its investors.

resulted in FTX investors collectively sustaining billions of dollars in damages.

which Defendants are liable.

16. Plaintiff Alexander Chernyavsky is a citizen and resident of Florida. He is a

for which Defendants are liable.

Defendants are liable.

resident of Ventura, California.

JURISDICTION AND VENUE

state different than the Defendants.

engaged in a conspiracy in which some of the co-conspirators—including some who are

Members who reside in this District.

performed, excused, waived, or have otherwise occurred.

I. Background on Cryptocurrency Litigation Relating to the Promotion of YBAs

Statement Urging Caution Around Celebrity Backed ICOs,” 5

In the SEC’s Report of Investigation concerning The DAO, 6 the

and Celsius 9 all offered these same accounts as unregistered securities.

in connection with celebrity endorsements, including of items such as cryptocurrency.

the FTX Entities.

I have over 40 years of legal and restructuring experience. I have

2022) (emphasis added).

securities national disaster, greatly surpassing the Madoff ponzi scheme.

are 3-time NBA Champions—play.

II. Background on FTX

multi-billion-dollar mobile application cryptocurrency investment service (the “FTX Platform”)

offered interest bearing cryptocurrency accounts.

45. In many ways, centralized cryptocurrency exchanges, including FTX, are

accounts. FTX violated its own terms of service.

is dependent on the willingness, ability, and approval of the exchange.

earned, when applicable customers attempt to redeem or withdraw those funds.

bearing accounts in general was not adequately represented.

despite such measures, becomes insolvent. Id.

confidence may not be warranted.

to store assets, whether cryptocurrency assets or fiat assets.

exchange’s failure include:

a) The exchange borrowing against customer assets (either to fund business

of the cryptocurrency has effectively lost its money.

III. The Rise and Fall of FTX and Alameda

know what we’re doing,’”

operations was in Miami, Florida. 13

customers’ funds) highly vulnerable to adverse market movements. 15

would have been much more expensive.

FTX filed for Chapter 11 bankruptcy and Bankman-Fried resigned as CEO. 26

76. Following his resignation, Bankman-Fried issued a 22-tweet-long explanation of