Superstar celebrities like NFL quarterback Tom Brady and comedian Larry David are facing lawsuits for supporting the bankrupt cryptocurrency exchange FTX. Due diligence is important, and his now infamous FTX ad “Stephen Curry is not a cryptocurrency expert” was right.
In December of last year, lawyers filed a class action lawsuit against former FTX CEO Sam Bankman-Fried and celebrities such as Brady and David, following the collapse of the FTX cryptocurrency exchange. The complaint alleges that celebrities are “responsible for billions of dollars in damages they have caused” by giving credit to a failed cryptocurrency exchange.
Unlike Bankman-Fried, who was arrested and charged with multiple wire fraud and money laundering charges for siphoning client funds for risky investments and campaign donations, at least 11 celebrity supporters Caught in the FTX drama without facing prison: supermodel Gisele Bündchen, NBA star Stephen Curry, tennis prodigy Naomi Osaka and former baseball superstar David “Big Papi” Ortiz. , endorsed by celebrities such as Shark Tank’s Kevin O’Leary. All of them have been involved in appearing in paid advertising campaigns and endorsing exchanges.
The complaint specifically alleges that FTX customers were trading “unregistered securities” regulated by the Securities and Exchange Commission (SEC) through their involvement with the FTX platform. Therefore, Brady and other celebrity backers had to reveal the details of their financial agreement with FTX. Plaintiffs allege that these individuals failed to provide specific information regarding their financial arrangements with FTX and that they did not undergo the required due diligence prior to promoting the company, resulting in compliance with Florida securities laws and consumption laws. They allege that they have violated the Civil Protection Act.
In one of FTX’s advertising campaigns, Brady and his ex-wife Bündchen featured an enthusiastic Brady calling a friend to pitch him to trading crypto on FTX. FTX. come in? “
As such, the FTX case is interesting not only because of the criminal charges against Bankman-Fried. It can also set a precedent for legal liability for products and services endorsed by celebrities. Let’s break down this argument based on the legal precedents that already exist today.
howie test
The complaint alleges that FTX accounts are securities based on: SEC vs. Howey, a 1946 Supreme Court case involving two Floridians who invested in a real estate contract on land with orange groves. The Supreme Court ruled that a contract is “a contract, transaction, or scheme under which individuals are led to invest their money in a common enterprise and expect profits solely from the efforts of their promoters or third parties.” I decided there was. Since the man was not a farmer, he was unable to influence the outcome of his venture and was dependent on promoters or third parties for profit. will exercise a higher standard of care when approving products that contain financial disclosure requirements.
The question of whether certain cryptocurrencies are securities Howie This is a major issue plaguing not only the cryptocurrency industry, but financial regulators across Congress and government agencies. The plaintiffs in the lawsuit against FTX asked the court to predetermine the issuance of securities, but even if the judge ruled that FTX’s favorable accounts were not securities, the plaintiffs were subject to Florida’s strict consumer protection laws. Consumer protection laws prohibit “unconscionable, deceptive, or unfair conduct or practices in the conduct of a transaction or transaction.”
As such, the FTX lawsuit raises fundamental and interesting questions.
What is the necessary due diligence required of basketball star Shaquille O’Neal or Jacksonville QB prodigy Trevor Lawrence? What should the due diligence process have been before advertising?
Kim Kardashian precedent
This is not the first time celebrity supporters have been sued for promoting crypto-related products.
In December 2022, a federal judge in California dismissed a lawsuit from investors accusing Kim Kardashian, boxer Floyd Mayweather Jr. and others of supporting a cryptocurrency known as EthereumMax (EMAX). . Kardashian and other celebrities have agreed to pay the SEC millions in fines for not disclosing that they were paid to approve the EMAX token.
SEC Chairman Gary Gensler, who issued a warning to celebrity-backed ICOs in 2017, said, “When celebrities and influencers endorse investment opportunities involving cryptocurrency securities, those investment products are the right ones for all investors.” It does not mean that
The law requires celebrities to disclose when and how much they have been paid to facilitate their investment in securities. But despite the SEC’s fines and warnings, the court ruled Kardashian was not responsible. Instead, the court dismissed the case, ruling that investors should “act reasonably before making bets based on the zeitgeist of the time.” Admittedly, Brady and company may set a legal precedent, as there isn’t much case law on celebrity supporter liability. authorities.
SEC and FTC
There are essentially two primary federal agencies that regulate deceptive advertising space. The SEC, if the matter concerns securities, and the FTC, which is generally responsible for regulating false advertising and fraudulent trading practices. FTC rules clarify that celebrity endorsers can be held liable if they make false statements during the endorsement process.
To hold celebrity supporters accountable, perhaps, they should know about false and misleading statements at the time they are made. The FTC provides a working example in its recent guidance. Advertisers are also responsible for any misrepresentations made through endorsement. “
In one case, following consumer complaints, the FTC sued former baseball star Steve Garvey, alleging his claims about weight loss supplements “fat trappers” and “exercising with a bottle” were seriously misleading. Did. He further argued that as a celebrity advocate, he was a direct participant in a deceptive advertisement and could be held liable for false statements made during the advertisement. The court ruled in Garvey’s favor, stating that Garvey could not be held liable as a direct participant because he had no actual knowledge of the material misstatement. said. In general, the FTC is more interested in advertisers than celebrity endorsers.
Did Larry David know that SBF was conflating funds or that Alameda had stakes in FTX-issued FTT tokens? As with much of the recent cryptocurrency regulation, FTX litigation may hinge on whether FTX interest-bearing accounts are securities.
Whatever the court decides, this lawsuit will have broader implications for the cryptocurrency industry. Are celebrities like Larry David more likely to be held liable to investors and consumers when securities are involved? Only time (and the courts) will tell.
Even without liability in court, celebrity endorsers have lessons to learn. As he recently saw in the dismissal of the EthereumMax class action lawsuit, bringing these cases under U.S. law can be difficult. ‘Kraninger, who is now vice president of regulatory affairs at Solidus Labs, continues: Just like investors should be skeptical and do their research, so should celebrities do their due diligence. “
So one thing is certain: celebrity endorsers are likely to pause before signing up to promote a product they know nothing about. Even winning a lawsuit is worse than not being brought to court in the first place. A little research can avoid that hassle.
In other words, as the now infamous FTX Super Bowl ad warned, “please do not Be like Larry. “