Crypto Currency and Celebrity Consequence

Caught up in the wake of FTX’s spectacular downfall, multiple celebrities are now finding themselves subject to proposed class-action lawsuits in connection with their role in promoting FTX.  Among those included in the proposed suits include celebrity athletes Naomi Osaka, Stephen Curry, and Tom Brady.[1]  Celebrity endorsement is nothing new, but this latest chapter in cryptocurrency concerns presents interesting issues that could have lasting effects on celebrity liability.

Sam Bankman-Fried and Gary Wang founded Futures Exchange (FTX) in 2019 as a centralized cryptocurrency exchange, with FTX acting as a broker.[2]  At its peak, FTX was the third largest exchange by volume,[3] and inked promotional deals with celebrities across multiple industries like Kevin O’Leary, Larry David, and Shaquille O’Neill.  All promotional deals included compensation of some kind for promotion of the brand.[4]  As part of their plan to grow FTX, with their celebrity roster, FTX acquired the naming rights to Miami-Dade arena,[5] home of the Miami Heat, which up until recently was named FTX Arena.[6]  With business seemingly booming, FTX’s rapid downfall came as shock to many.[7]  After declaring bankruptcy in November 2022, numerous class-action lawsuits have been filed.[8]

Two complaints seeking to include celebrities as liable parties are filed in Florida.  Both complaints allege that FTX sold unregistered securities and aim to hold the defendant celebrities as liable parties by being an active part of the deception.[9]  Using paid promotions like social media posts and commercials, FTX utilized the celebrity endorsement to build credibility with prospective users and drive usage of the FTX platform.  However, none of the celebrities involved are considered a mastermind of the fraud.[10]  As alleged in the complaints, the role of the celebrity ambassadors was to use their influence stemming from their star power to dupe their millions of followers into investing in FTX.[11]

The FTX lawsuits, however, are not the first suits alleging celebrity liability in connection with the promotion of cryptocurrency.  In 2022, Ryan Huegerich and a group of EthereumMax investors sued Kim Kardashian and Floyd Mayweather Jr., amongst others, in the U.S. District Court for the Central District of California in connection with their promotion of cryptocurrency EthereumMax.[12]  The suit alleged that Kardashian and Mayweather Jr. conspired together to deceptively promote and sell EthereumMax to potential public investors, then sell their own shares of EthereumMax tokens for profit.[13]  In a victory for the celebrity promoters, Judge Michael Fitzgerald rejected the plaintiffs’ claims against the celebrities for their alleged role in aiding and abetting the scheme.[14]  Judge Fitzgerald even went as far as placing some of the blame on investors, writing:

The Court acknowledges that this action raises legitimate concerns over celebrities’ ability to readily persuade millions of undiscerning followers to buy snake oil with unprecedented ease and reach. But, while the law certainly places limits on those advertisers, it also expects investors to act reasonably before basing their bets on the zeitgeist of the moment.[15] 

The victory may only be temporary, as Fitzgerald granted leave to amend, giving plaintiffs another chance to prove their case against the celebrities.[16]  Regardless, the district court’s skepticism towards the role celebrities played in the scheme is potentially indicative of how the court may rule in the pending FTX cases.

The distinction of whether FTX accounts are ruled as securities or not is particularly important for the celebrities involved since that determination could impact how the plaintiffs can prove their case and hold the celebrities liable.  Should the FTX accounts be ruled as securities, Federal Securities Law will apply, as well as state “Blue Sky Laws” which protect investors from fraudulent practices.[17]  In turn, Blue Sky Laws can hold celebrities liable for damages even if they weren’t aware of the fraud.[18]  In both of the recently-filed FTX suits, Florida Blue Sky Laws banning the sale of unregistered securities are among the laws alleged to be violated.[19]  Should the court rule that the FTX accounts are not securities, it will become significantly harder for the plaintiffs to hold the celebrities accountable, and many of the applicable laws alleged to be violated would no longer apply.

In addition to alleged violations of Florida Blue Sky Laws, the celebrities involved are also alleged to be part of a civil conspiracy.[20]  By conspiring with FTX, plaintiffs assert that the celebrity promoters assisted or encouraged the fraud by making misrepresentations to induce investors into using the FTX platform.[21]  The complaints further accuse that the celebrities had knowledge of the fraud and knew their representations were deceitful.[22]  With the FTX suits, the Florida courts could follow in the way of the suit against Kardashian and rule that plaintiffs haven’t sufficiently pleaded enough facts to indicate a conspiracy.

Whether cryptocurrency is a security remains a contentious topic. Gary Gensler, the chair of the SEC, has called for most cryptocurrencies to be considered securities,[23] but courts are still deciding.  The obstacles to recovery remain substantial for the plaintiffs. In attempting to prove conspiracy, the plaintiffs will likely run into the same problems the plaintiffs in Huegerich v. Gentile faced where the court said the plaintiffs were unable to plead sufficient facts to show the requisite knowledge required to show conspiracy.[24]  With the FTX cases at hand, the complaints don’t seem to allege with any specific facts that the celebrity promoters knew they were promoting fraud.  As the cases are still in their early stages, what the courts decide will be important moving forward.  If following in the way of the suit against Kardashian, the involved celebrities will likely find the charges against them dismissed and their lives will move on.  If, however, the charges are not dismissed, the named celebrities will find themselves in a long court battle as a casualty of FTX’s downfall.

Regardless of the outcome, the fallout of FTX and EthereumMax will likely give celebrities pause when considering promotional deals, especially deals involving financial products.  For her role in promoting EthereumMax, Kardashian faced the consequences and settled with the SEC by paying $1.26 million in penalties.[25]  Though celebrity endorsement is unlikely to go away anytime soon, what the Florida courts ultimately decide in the FTX cases could have a lasting effect on how celebrities approach promotional deals.  At the end of the day, thousands—if not millions—of FTX customers are out significant amounts of money, with little hope of recovering all, if any, of their money.[26]  The question of who should be liable, and who should pay, remains. For now, investors and celebrities will wait and see as the courts decide if the claims against them may proceed.  

[1] Complaint at 2, Podalsky v. Bankman-Fried, No. 1:2022cv23983 (S.D. Fla. filed Dec. 7, 2022); Complaint at 2, Garrison v. Bankman-Fried, No. 1:2022cv23753 (S.D. Fla. filed Nov. 15, 2022).

[2] The Associated Press, The Downfall of Ftx’s Sam Bankman-Fried Sends Shockwaves Through the Crypto World, NPR (Nov. 14, 2022, 10:54 AM), https://www.npr.org/2022/11/14/1136482889/ftx-sam-bankman-fried-shockwaves-crypto.

[3] Id.

[4] Podalsky, supra note 1, at 7.

[5] The Associated Press, supra note 3.

[6] Associated Press, Miami Heat’s Home to Be Temporarily Called Miami-Dade Arena, ESPN (Jan. 13, 2023), https://www.espn.com/nba/story/_/id/35440678/miami-heat-home-temporarily-called-miami-dade-arena.

[7] The Associated Press, supra note 3.

[8] Luke Huigsloot, 7 Class Action Lawsuits Have Been Filed Against SBF So Far, Records Show, Coin Tel. (Dec. 9, 2022), https://cointelegraph.com/news/7-class-action-lawsuits-have-been-filed-against-sbf-so-far-records-show.

[9] See Podalsky, supra note 1, at 4; see also Garrison, supra note 1, at 4.

[10] See Podalsky, supra note 1, at 7; see also Garrison, supra note 1 at 21.

[11] Id.

[12] Complaint at 2, Huegerich v. Gentile, No. 2:22-CV-00163 (C.D. Cal. filed Jan. 1, 2022).

[13] Id. at 14-15.

[14] Order Re: Defendants’ Omnibus Motion to Dismiss and the Individual Defendants’ Motions to Dismiss at 4, In Re EthereumMax Investor Litigation, No. 2:22-cv-00163 (C.D. Cal. filed Dec. 6, 2022).

[15] Id. at 1.

[16] Id. at 4.

[17] Blue Sky Laws, U.S. SEC https://www.investor.gov/introduction-investing/investing-basics/glossary/blue-sky-laws (last visited Feb. 4, 2023).

[18] Winston Cho, Celebrities Shilling Crypto Face More Than Just Mockery, The Hollywood Rep. (Dec. 16, 2022), https://www.hollywoodreporter.com/business/digital/ftx-crypto-regulators-feds-scrutiny-1235283202/.

[19] See Podalsky, supra note 1, at 46; see also Garrison, supra note 1, at 36.

[20] See Podalsky, supra note 1, at 48; see also Garrison, supra note 1, at 38.

[21] See Podalsky, supra note 1, at 48; see also Garrison, supra note 1, at 38.

[22] See Podalsky, supra note 1, at 48; see also Garrison, supra note 1, at 38.

[23] Tobi Opeyemi Amure, Most Cryptocurrencies Are Securities, Says SEC Chair, Investopedia (Sept. 8, 2022), https://www.investopedia.com/gensler-on-crypto-6544288.

[24] In Re Ethereummax Investor Litigation, supra note 15, at 41.

[25] James Vincent, Kim Kardashian Pays $1.26 Million After Being Charged with Illegally Promoting Crypto Scheme, The Verge (Oct. 3, 2022, 5:41 AM), https://www.theverge.com/2022/10/3/23384789/kim-kardashian-crypto-fine-sec-pump-and-dump-ethereum-max.

[26] Max Zahn, Will FTX Traders Get Their Money Back? Bankruptcy Experts Weigh In, ABC News (Dec. 23, 2022, 9:02 AM), https://abcnews.go.com/Business/ftx-traders-money-back-bankruptcy-experts-weigh/story?id=95727711.