For the uninitiated, the world of cryptocurrencies exists on the fringes of traditional finance. But every now and then more people are taking notice. This year’s coveted commercial breaks during the Super Bowl fit the bill, as several now-infamous commercials featured crypto stars. Larry David appeared on FTX, as did Matt Damon and LeBron James In the Crypto.com videos.
By being featured in the most premium TV real estate and partnering with Hollywood’s most trusted brand ambassadors, crypto firms have gained an air of confidence on their way to legitimacy. Or at least it looked like they were on their way there, until FTX, one of the world’s top digital currency exchanges, which also issues its own token called FTT, collapsed as customers ran on the exchange amid a months-long crypto rally. selling On December 12, FTX founder Sam Bankman-Fried was charged and arrested for violating securities laws, a month later he was sued in a proposed class action lawsuit alongside the stars who promoted the company.
FTX account holders, in addition to those who bought now-worthless crypto from other issuers that filed for bankruptcy, will likely recoup pennies on the dollar for their investments. FTX’s new CEO, John J. Ray III On December 13, he told the committee of the House of Representatives. “We won’t be able to recover all the losses here.” They sit in line behind higher priority creditors. Now a new study is being done on the A-listers that FTX has approached to wash its reputation. While they may not have been knowingly fraudulent, they may have been involved in promoting unregistered securities. “The people most responsible happen to be billionaires,” said Adam Moskowitz, who represents clients of FTX and Voyager in proposed class actions against the crypto exchange firms.
Bankman-Fried leveraged the world of entertainment and celebrity to grow his 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, baseball umpire uniform patches and star-studded television commercials promoting the stock market as a safe place to invest money.
“People are generally hesitant when it comes to the unknown,” said Sina Nader, a former US FTX executive who led the exchange’s partnership, speaking to it. The Hollywood Reporter for a story from 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 the entire MLB is comfortable with crypto and FTX, then maybe I can fit in. with it.” 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 raised through new investments to pay off old investments and maintain the appearance of liquidity. The suit alleges that FTX’s interest accounts are securities that obligate promoters to disclose compensation from the company.
Other celebrities named in the complaint include Gisele Bündchen, Shaquille O’Neal and Naomi Osaka. They all appeared in FTX commercials. The lawsuit alleges that Osaka was paid a share of the company’s stock and an undisclosed amount of crypto. So were FTX ambassadors Brady, Bundchen and MLB All-Star Shohei Ohtani, all of whom neglected to disclose the company’s payments, the lawsuit alleges. Similar allegations were made in a lawsuit filed Dec. 8 against stars including Jimmy Fallon, Gwyneth Paltrow and Justin Bieber who promoted Bored Ape Yacht Club’s irreplaceable tokens.
This is a profitable game. Shark tank star Kevin O’Leary, also a paid ambassador for FTX, testified before the Senate Banking Committee on December 14, saying that FTX paid him a staggering $18 million to promote the exchange, including $3 million to cover taxes, $1 million in FTX equity. (now “probably worthless,” he said) and $10 million in crypto tokens held in FTX wallets (“I wrote them down to zero,” he told the committee).
A-list promoters of crypto and other digital assets have already run into legal trouble, with civil fraud lawsuits a major consideration. On October 3, the Securities and Exchange Commission charged Kim Kardashian with endorsing EthereumMax on Instagram without disclosing the $250,000 payment she received for the promotion. He settled the case for $1.3 million. Floyd Mayweather Jr. and DJ Khaled have settled similar lawsuits filed by the SEC to not disclose payments they received to promote investments in initial coin offerings.
“Federal securities laws are clear that any celebrity or other individual promoting the security of crypto assets must disclose the nature, source and amount of compensation received for the promotion,” said SEC Division Director Gurbir S. Grewal. in the statement regarding the enforcement of Kardashian’s settlement.
But there is a ruling that challenges the idea that stars can be held accountable for their alleged complicity in crypto trading. On December 7, a federal judge dismissed a lawsuit against EthereumMax’s backers, accusing them of fraudulently misleading millions of followers into buying EMAX tokens, only to sell their own shares when its value was inflated. While the case raises “legitimate concerns” about celebrities’ ability to persuade unsuspecting followers to buy snake oil with “unprecedented ease and accessibility,” US District Judge Michael Fitzgerald found that “investors are expected to act reasonably before placing their bets.” hold the anger.”
“This is a volatile area, and people need to do their own research,” said Daniel Dubin, an attorney at Alston & Bird, who is skeptical that stars face much legal exposure. “[This ruling] sets the right tone for these types of proceedings. You don’t want to excuse someone for investing in something they should have known was a bad investment.”
The FTX trial takes a different approach. Moskowitz, an attorney representing FTX account holders, is seeking a court order in a separate class-action lawsuit filed in Florida state court alleging that FTX offered unregistered securities in the form of interest-bearing accounts. The judge will consider 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 Dillendorff, a lawyer specializing in crypto, emphasizes that FTX interest accounts are securities because they require the investment of money in a common enterprise where there is an expectation of profit from the efforts of third parties. “If I’m buying something like a digital token or an NFT, I’m buying an investment contract,” Dillendorff says. “The only reason I buy is because I expect a profit.”
Dillendorff emphasizes the SEC’s position that most cryptos are securities and are subject to disclosure and registration requirements backed up in lawsuits filed by the agency where courts have applied the Howey test. In 2020, a federal judge in New York ruled in favor of the SEC in its lawsuit against Kik, finding that the company 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 hand over $1.2 billion in illegal profits and pay $18.5 million in fines.
Even if they did not knowingly participate in the alleged scheme, popular promoters may be required to pay 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 requires a tort claim, is the way courts have allowed courts to recover money from investors who even benefited from Bernie Madoff’s Ponzi scheme. : even though they were unaware of the fraud. While O’Neill may try to distance himself from FTX, saying on Dec. 15 that he’s “just a paid spokesperson,” that issue will be decided by the courts during the pending trial.
A version of this story first appeared in the Dec. 16 issue of The Hollywood Reporter. Click here to subscribe.