UK: Has Your Organisation Been Affected By The FTX Fallout?

If you've been following the news over the last few months, and in particular the last couple of weeks, you'll have seen the headlines surrounding Sam Bankman-Fried – the co-founder of the failed cryptocurrency exchange platform, FTX, who oversaw the high profile failure of the business that was initially said to have cost its clients some $8bn and who was recently handed a 25-year jail sentence after a Court in New York found him guilty of fraud and conspiracy to launder money.

Having at one time been valued in the region of $32 billion, FTX ended up filing for bankruptcy in the US Bankruptcy Court of Delaware in November 2022. In what's been described as a spectacular collapse, it has since emerged that Bankman-Fried and others working alongside him at FTX perpetuated a massive fraud by squandering customer assets on luxury homes, political contributions, and various investments, as well as by making multiple donations to charities and other organisations. In total, some $8 billion of customer funds were "lost" by these acts of embezzlement.

Since the collapse of FTX into bankruptcy in November 2022, the US lawyers appointed to oversee FTX's bankruptcy have been working to recover the money or property belonging to FTX in order to maximise the recovery of its creditors – and that has included seeking returns of donations from businesses and charities who received grants from the FTX Foundation, the philanthropic arm of the FTX. Many organisations received grants to undertake projects which could have had a positive impact on society, but which are now at serious risk or have had to be brought to an end altogether.

Whilst it can be easy to assume that this drama is being played out thousands of miles away across the pond, in fact a significant number of charities and other businesses based in England and Wales have unfortunately found themselves caught up in the epic fallout, having received donations or grants from the FTX Foundation, and, in turn, a legal demand for the repayment of the funds in the ongoing US bankruptcy proceedings and facing the prospect of being involved in expensive cross border litigation. This has had a serious and significant impact on many organisations.

Having helped support a number of clients facing demands and the threat of litigation from US lawyers we know that it can be very challenging for an organisation to work their way through the numerous tricky issues that they have to face – complex issues that have to be carefully considered, weighed up and managed, in order for directors and trustees to decide on the best course of action for their organisation.

What are some of the key issues to be aware of?

To start with, there is an international element to any demand, as the claims arise under the United States Code (the "Bankruptcy Code") and pursuant to the jurisdiction of a US bankruptcy Court. This may mean organisations based in England and Wales will need both guidance from English lawyers as well as US based lawyers, for example, on the merits of the claim but also on the specific Court procedure(s) that governs claims within the Bankruptcy Court, including in the context of any settlement of a dispute.

For organisations based in England and Wales, this international aspect also raises complex issues around whether the US Court has jurisdiction to determine a claim against organisations based here (and what steps a defendant would need to take to meet the applicable tests), as well as on the enforceability of any Order from a US Court against organisations based in these locations. These are technical and complex legal issues, the answers to which are likely to have a critical impact on the development of the strategy for dealing with the claim(s).

Organisations will also need to consider criminal and civil regulatory issues relevant to them /their sector and the claim being made against them. For example, in addition to sector requirements, a recipient of funds connected with FTX may need to consider whether to request a specific form of consent from the National Crime Agency to enable the organisation to deal with the funds in a prescribed manner pending the resolution of the claim, while also being careful that they do not inadvertently fall foul of an offence of "tipping off" under the Proceeds of Crime Act 2002.

For charities, there are additional regulatory issues to keep in mind – for example, trustees will need to consider whether the receipt of the demand (or their relationship with the FTX Foundation) triggers a requirement to notify the Charity Commission of a serious incident (in accordance with the Commission's guidance on serious incident reporting), and they may need to keep the Commission updated as matters develop.

If trustees are considering settling the claim, they will also need to ensure that they have the relevant power (within their governing document) or consent from the Charity Commission, as applicable, to agree to and implement any proposed settlement terms, taking into account the Commission's guidance on compromising claims in its guide: Charities and Litigation: a guide for trustees.

In the worst case scenario, the Charity Commission could even commence a statutory inquiry to formally investigate matters. Ultimately, whatever decisions are made, trustees must apply principles of good decision making and ensure that they are acting in the best interests of the charity.

Although funds received may have been ear marked for a positive or impactful project, given the high-profile nature of the FTX's fall from grace organisations will need to consider what reputational risks they face in light of their connection to the FTX Foundation, and what steps they may need to take to minimise any reputational damage.

It is also possible that, for some organisations, the demand for repayment could put them at a theoretical or actual risk of insolvency, so they may need to consider seeking advice from a specialist insolvency lawyer or insolvency practitioner. One thing we can say for sure is that it will be quite some time before all the dust has settled.

How can we help?

Given the range of complex issues at play, if your organisation finds itself caught up in the FTX fallout we'd recommend seeking early legal advice to help you understand your legal position and options. We can work with you to implement a strategy for resolving the issue in line with your legal and regulatory duties, and, as far as possible, at minimum cost and disruption to your business.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.