Doug Raymond Discusses Cryptocurrency Litigation With Carrier Management

In “FTX Liability Tentacles Spread Far,” Carrier Management turned to corporate partner Doug Raymond for his insight on the collapse of cryptocurrency exchange FTX Trading and its potential claims against insurers providing directors and officers (D&O) liability, errors and omissions (E&O), and employment practices liability insurance.

Raymond conducted a Lex Machina search in federal courts on behalf of the publication, searching for mention of the word “cryptocurrency” in complaints filed over the past year, and found 475 cases. “Given the spectacular collapse of FTX and all the publicity around it, a lot of litigation has been filed,” explained Raymond, who also commented on the increase of crypto lawsuits, noting, “It’s very easy to file a lawsuit. More are likely.”

Regarding D&O crypto litigation, Raymond said that if a trial proceeds in a class action involving companies that invested assets in cryptocurrencies that fell sharply in value, plaintiff attorneys will allege that the board directors either failed to make a good faith effort to exercise their duty of care, failed to properly oversee a substantial and known risk, or failed in their duty of oversight, also known as “Caremark claims,” from a seminal court decision.

“This is a situation where there is a risky asset or a novel risk,” Raymond added. “The question is whether the board had adequate oversight of the risks…and pushed management to have adequate procedures in place to supervise the risks. If this is not the case, the argument will be that the company wrongly invested in cryptocurrencies and the directors breached their duty of oversight.”

“If someone is investing in crypto, the standard legal issues have to do with disclosure of the risks and adequate warning of potential troubles,” Raymond said regarding E&O claims. “This is especially the case for financial advisers who are fiduciaries that must act in the customer’s best interest.”

Raymond commented that professional liability for a financial adviser is hinged to what is known as the suitability standard, the recommendation of specific investments deemed suitable for a particular client.