Celebrities Shilling Crypto Legal Exposure In Focus – The Hollywood Reporter

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For the uninitiated, the world of cryptocurrency exists on the periphery of traditional finance. But every once in a while, more people notice. This year’s coveted commercial breaks during the Super Bowl did the trick, as several now infamous commercials featured stars peddling crypto. Larry David appeared in a spot for FTX, as did Matt Damon and LeBron James in Crypto.com clips.

By appearing in the highest-end real estate in all of television and partnering with some of Hollywood’s most trusted brand ambassadors, crypto firms have provided themselves with an air of credibility on the road to legitimacy. . Or, at least, it looked like they were on their way there, until FTX – one of the world’s leading digital currency exchanges that also issues its own token called FTT – collapses when customers have made a run on the exchange over a multi-month crypto span. clearance sale. On Dec. 12, FTX founder Sam Bankman-Fried was charged and arrested for violating securities laws, a month after he was sued in a proposed class action lawsuit alongside stars who made business promotion.

FTX account holders, in addition to those who purchased now worthless crypto from other issuers that have filed for bankruptcy, are likely to recoup pennies on the dollar on their investments. FTX’s new chief executive, John J. Ray III, told a House committee Dec. 13, “We won’t be able to recoup all the losses here.” They line up behind a crowd of higher priority creditors. Now, a new scrutiny is on the A-listers that FTX has turned to to launder their reputation. Although they may not have knowingly committed fraud, they could be accused of promoting unregistered titles. “The most responsible people happen to be billionaires,” says Adam Moskowitz, who represents FTX and Voyager customers in proposed class action lawsuits against crypto exchange companies.

Bankman-Fried has leveraged the world of entertainment and celebrity to grow its business, attract new crypto buyers, and establish FTX as an island of legitimacy in a sea of ​​scams. His aggressive marketing strategy included partnerships with NBA teams, patches on Major League Baseball umpires’ uniforms, and flashy TV commercials from stars touting the exchange as a safe place to invest money.

“People are usually hesitant when it comes to the unknown,” former FTX US executive Sina Nader, who led partnerships for the exchange, said when interviewing The Hollywood Reporter for a story. a little over a year ago. “Working with trusted people and institutions, people will look and say, oh, if Stephen Curry, or Tom Brady, or Gisele, or Trevor Lawrence, or all of MLB is comfortable with crypto. and FTX, so maybe I can get comfortable with that too.”

In a lawsuit filed Nov. 15, FTX account holders sued Bankman-Fried and stars who endorsed the platform, including David, and others like Tom Brady and Stephen Curry. They allege the company was a “Ponzi scheme” that used funds obtained through new investments to repay old investments and maintain the appearance of cash. The lawsuit claims FTX’s interest-bearing accounts were securities, which would require the promoters to disclose the company’s compensation.

Other celebrities named in the complaint include Gisele Bündchen, Shaquille O’Neal and Naomi Osaka. They have all appeared in commercials for FTX. The lawsuit claims that Osaka received an equity stake in the company and undisclosed amounts of crypto. So did FTX ambassadors Brady, Bündchen and MLB All-Star Shohei Ohtani — all of whom neglected to disclose company payments, according to the lawsuit. Similar charges were filed in a lawsuit filed Dec. 8 against stars such as Jimmy Fallon, Gwyneth Paltrow and Justin Bieber, who promoted Bored Ape Yacht Club non-fungible tokens.

It’s a lucrative game. Shark Tank star Kevin O’Leary, also a paid ambassador for FTX, testified before the Senate Banking Committee on December 14, telling them that FTX paid him $18 million to promote the exchange, including $3 million in dollars to cover taxes, $1 million in FTX equity (now “most likely worthless,” he said), and $10 million in crypto tokens held in FTX wallets (“I got them written off at zero,” he told the committee).

Prominent promoters of crypto and other digital assets have run into legal trouble before – a key consideration in civil lawsuits alleging fraud. On October 3, the Securities and Exchange Commission accused Kim Kardashian of Instagram endorsement of EthereumMax without disclosing a $250,000 payment she received for the promotion. She settled the case for $1.3 million. Floyd Mayweather Jr. and DJ Khaled have resolved similar lawsuits filed by the SEC for failing to disclose payments they received for promoting investments in an initial coin offering.

“Federal securities laws clearly state that any celebrity or other person who promotes a crypto asset security must disclose the nature, source, and amount of compensation they received in exchange for the promotion,” said SEC Division Director Gurbir S. Grewal. of Enforcement, in a statement about Kardashian’s settlement.

But there is a ruling challenging the notion that stars can be held responsible for their alleged complicity in crypto trafficking. On Dec. 7, a federal judge dismissed a lawsuit against EthereumMax endorsers accusing them of fraudulently misleading their millions of subscribers to buy EMAX tokens, only to then sell their own stakes once that its value has been inflated. As the case raises “legitimate concerns” about celebrities’ ability to persuade indiscriminate followers to buy “snake oil with unprecedented ease and reach,” U.S. District Judge Michael Fitzgerald concluded that “investors are expected to act reasonably before basing their bets on the prevailing zeitgeist.

“This is a volatile area, and people need to do their own research,” says Daniel Dubin, a lawyer at Alston & Bird, who is skeptical that stars face great legal exposure. “[This ruling] sets the right tone for this type of litigation. You don’t want to excuse someone for investing in something they should have known was a bad investment.

The FTX litigation takes a different approach. Moskowitz, the attorney representing FTX account holders, is seeking a court order in a separate class action lawsuit filed in Florida state court alleging that FTX was offering unregistered securities in the form of accounts carrying interest. A judge will examine the issue using the Howey test, a standard that emerged in a 1946 Supreme Court case for determining whether a transaction qualifies as an investment contract.

Max Dilendorf, a crypto attorney, points out that FTX interest-bearing accounts are securities because they require money to be invested in a joint venture where profits are expected through the efforts of others. “If I buy something like a digital token or an NFT, I’m buying an investment contract,” says Dilendorf. “The only reason I buy is because I expect a profit.”

Dilendorf points to the SEC’s position that most cryptos are securities and are subject to disclosure and registration requirements, backed up by lawsuits filed by the agency in which courts applied the Howey test. In 2020, a federal judge in New York ruled in favor of the SEC in its lawsuit against Kik and found that the company had illegally sold unregistered securities through an initial coin offering. The order was followed by an identical ruling in another lawsuit against Telegram, which was forced to forfeit $1.2 billion in ill-gotten gains and pay an $18.5 million fine.

Even if they did not knowingly participate in the alleged scheme, celebrity promoters may be liable for damages if the exchange is found to have sold unregistered securities. The so-called “blue sky” law – enacted by various states to protect consumers from securities fraud – which the lawsuit alleges a violation is the means that allowed courts to recover money from investors who profited from the scheme Bernie Madoff’s Ponzi scheme even though they were unaware of the fraud. While O’Neal may be trying to distance himself from FTX by saying on Dec. 15 that he was “just a paid spokesperson,” that issue will be decided by the courts in a legal dispute. Classes.

A version of this story first appeared in the December 16 issue of The Hollywood Reporter magazine. Click here to subscribe.

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