FTX seeks to stop outside litigation against insiders, VC firms

FILE PHOTO: Illustration shows FTX logo

(Removes name of FTX insider Daniel Friedberg, who was incorrectly listed among those that have pleaded guilty in paragraph 10)

By Dietrich Knauth

NEW YORK (Reuters) -FTX on Tuesday asked a U.S. judge to stop outside litigation against company insiders and venture capital firms accused of playing a role in the bankrupt crypto exchange's collapse, saying the lawsuits undermine FTX's own effort to repay customers.

The lawsuits, including class action complaints filed by FTX customers, could eat into an estimated $16 billion recovery that the company intends to pay customers in its bankruptcy, FTX said in court documents filed Tuesday in federal court in Miami.

The class action litigation recently resumed after being placed on pause during the criminal trial of FTX founder Sam Bankman-Fried. He was sentenced in March to 25 years in prison for stealing from FTX customers and using their funds to prop up his own risky investments.

Plaintiffs in the class action lawsuits are seeking to take control of assets seized by federal prosecutors, litigate claims already being pursued by FTX, and charge 33% in attorneys' fees on recoveries that the class action lawyers had no role in obtaining, according to FTX.

FTX said that the class action lawyers were trying to pocket up to $400 million in legal fees "despite having to date provided next to no monetary benefit" for FTX customers and other victims.

Adam Moskowitz, a lead lawyer for the plaintiffs, said he looked forward to U.S. Judge K. Michael Moore's review of all of his clients' settlements and pending claims, including a fraud lawsuit filed against Sullivan & Cromwell, the law firm managing FTX's bankruptcy.

"Our goal is to provide relief for all FTX victims and we appreciate all parties that are helping our efforts," Moskowitz said.

FTX, which filed for bankruptcy in November 2022, recently announced that it will repay customers more than 100% of what they are owed – with the major caveat that it would evalute customer claims based on much-lower cryptocurrency prices from November 2022, when it filed for bankruptcy.

FTX has gathered as much as $16 billion to repay customers by selling assets and filing lawsuits to claw back money paid by FTX before it collapsed.

FTX in Tuesday's court filing said that settlements in the class action threatened to wipe out the company's legal claims against insiders that have pleaded guilty or been convicted of crimes, including Caroline Ellison, Gary Wang, and Nishad Singh, and interfere with its efforts to claw back funds from investment firms.

(Reporting by Dietrich Knauth; Editing by David Gregorio)