The next wave: will the US crypto litigation trend reach the UK?

Three lawsuits filed at Florida’s Southern District Court in November 2023 are the latest in a series of legal claims brought by investors looking for ways to recover losses arising out of failed crypto investments. The federal group actions are brought against high-profile promotors of crypto assets, including the Mercedes Formula 1 Team.

Sam Bankman-Fried, co-founder and former CEO of FTX, was found guilty on eight charges of fraud and money laundering offences, following a federal trial in New York. Several other key members of the FTX management team had previously pleaded guilty to various offences and gave evidence against Bankman-Fried.

Earlier in the year FTX investors sued celebrities such as NFL footballer Tom Brady, model Gisele Bundchen and comedian Larry David, who had been closely linked with promotions of the collapsed crypto exchange.

These investor-claimants alleged that the Mercedes Formula 1 team ‘aided and abetted’ fraud at FTX through its high-profile endorsements and promotions of FTX, the products of a lucrative sponsorship deal. By featuring FTX’s logo in highly visible placements, such as on its cars and social media feeds, investors allege that the team was a “necessary player” in the fraud.

Further class action lawsuits were filed against Major League Baseball, also by investors on the basis of its sponsorship and promotion of FTX facilitating fraud, and against footballer Cristiano Ronaldo by Binance investors for $1bn of losses they allegedly suffered through his promotion and association of the company’s products. In 2022, Binance announced a partnership with Ronaldo in collectible NFTs, the value of which dropped significantly after the initial sale values.

While crypto assets have attracted minimal tailored regulation in the US, at the heart of these lawsuits is the contention by the Securities and Exchange Commission (SEC) that crypto assets should be considered as securities. And thereby be subject to existing rules relating to securities, such as a requirement that celebrity endorsers reveal how much they have been paid to promote products or services.

Last year, there were a flurry of criminal prosecutions in the US against crypto exchanges and connected individuals, led by the SEC’s Gary Gensler taking a bullish approach. The conviction of FTX’s Bankman-Fried on eight fraud charges is the most high-profile of these. There have also been a number of criminal charges filed against celebrities such as Lindsay Lohan for promotion-related offences.

However, criminal convictions will not normally directly assist investors to recoup their losses. Investors globally have, therefore, continued to look for effective and inventive routes to recovery where they have lost money through crypto investment, whether through fraud or crashes in the value of their crypto investment.

Throughout 2022 and 2023, the UK courts saw numerous actions to recover losses suffered through crypto fraud. These were often applications for the disclosure of information from third parties such as crypto exchanges, underpinned by substantive claims against unidentified fraudsters (identified as carefully described ‘Persons Unknown’). However, with the cost of full-blown High Court litigation over months or years often being disproportionate to the sums lost, it appears that few of those claims have been scheduled for trial, and that where claimants have successful recovered some of their losses this has been through the strategic use of information obtained during the applications process.