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\n\tTo the uninitiated, the world of cryptocurrency exists on the outskirts of traditional finance. But every once in a while, more people catch a glimpse. This year\u2019s coveted commercial breaks during the Super Bowl fit the bill, as several now-infamous ads featured stars hawking crypto. Larry David <\/strong>appeared in a spot for FTX, as did Matt Damon and LeBron James <\/strong>in Crypto.com clips. <\/p>\n \n\tBy showing up in the most premium real estate in all of TV, and partnering with some of Hollywood\u2019s most trusted brand ambassadors, the crypto firms bought themselves an air of credibility on the path toward legitimacy. Or, at least it appeared they were on their way there, until FTX \u2014 one of the world\u2019s top digital currency-exchange platforms that also issues its own token called FTT \u2014 collapsed when customers made a run on the exchange amid a months-long crypto sell-off. On Dec.\u202f12, FTX founder Sam Bankman-Fried was charged and arrested for violations of securities laws, a month after he was sued in a proposed class action alongside stars who promoted the company.\u00a0<\/p>\n \n\tFTX account holders, in addition to those who bought now-worthless crypto from other issuers that filed for bankruptcy, are likely to recoup pennies on the dollar on their investments. FTX\u2019s new chief executive John J. Ray III <\/strong>told a House committee Dec.\u202f13, \u201cWe\u2019re not going to be able to recover all the losses here.\u201d They sit in line behind a host of creditors with higher priority. Now, new scrutiny is on the A-listers to whom FTX turned to launder its reputation. While they might not have knowingly committed fraud, they could be on the hook for promoting unregistered securities. \u201cThe people who have the most liability happen to be billionaires,\u201d says Adam Moskowitz, who is representing FTX and Voyager customers in proposed class actions against the crypto exchange firms.\u00a0<\/p>\n \n\tBankman-Fried leveraged the world\u00a0of entertainment\u00a0and celebrity\u00a0to grow his businesses, lure in new crypto buyers and establish FTX as an island of legitimacy in a sea of scams.\u00a0His aggressive marketing strategy featured partnerships with NBA teams, patches on Major League Baseball umpire uniforms and splashy TV ads of stars touting the exchange as a safe place to invest money.<\/p>\n \n\t\u201cPeople generally hesitate when it comes to the unknown,\u201d said former FTX U.S.\u00a0executive\u00a0Sina\u00a0Nader, who led partnerships for the exchange, when speaking with The Hollywood Reporter<\/em> for a story <\/a>just over a year ago. \u201cWorking 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 are comfortable with crypto and FTX, then maybe I can get comfortable with it too.\u201d\u00a0<\/p>\n \n\tIn a lawsuit filed Nov. 15, FTX account holders sued Bankman-Fried<\/a> and stars who endorsed the platform, including David, and others like Tom Brady and Stephen Curry. They allege the company was a \u201cPonzi scheme\u201d that used funds obtained through new investments to pay off old investments and maintain the appearance of liquidity. The suit claims that FTX\u2019s interest-bearing accounts were securities, which would obligate promoters to disclose compensation from the company.\u00a0<\/p>\n \n\tOther celebrities named in the complaint include Gisele B\u00fcndchen, Shaquille O\u2019Neal and Naomi Osaka. They all appeared in ads for FTX. The suit claims Osaka was paid an equity stake in the company and undisclosed amounts of crypto. So were FTX ambassadors Brady, B\u00fcndchen and MLB All-Star Shohei Ohtani \u2014 all of whom neglected to disclose payments from the company, the suit says. Similar accusations were lodged in a lawsuit<\/a> filed Dec. 8 against stars including Jimmy Fallon, Gwyneth Paltrow and Justin Bieber, who promoted Bored Ape Yacht Club nonfungible tokens.\u00a0<\/p>\n \n\tIt\u2019s a lucrative game. Shark Tank<\/em> star Kevin O\u2019Leary, also a paid ambassador to FTX, testified before the Senate Banking Committee on Dec. 14, telling them FTX paid him an astonishing $18 million to promote the exchange, including $3 million to cover taxes, $1 million in FTX equity (now \u201cmost likely worthless,\u201d he said), and $10 million in crypto tokens held in FTX wallets (\u201cI have written them off to zero,\u201d he told the committee).<\/p>\n \n\tA-list promoters of crypto and other digital assets already have run into legal trouble \u2014 a key consideration in civil suits alleging fraud. On Oct.\u202f3, the Securities and Exchange Commission charged Kim Kardashian for endorsing on Instagram EthereumMax without disclosing a $250,000 payment she received for the promotion. She settled the case for $1.3\u202fmillion. <\/strong>Floyd Mayweather Jr. and DJ Khaled have resolved similar suits filed by the SEC over failing to disclose payments they received for promoting investments in an initial coin offering.\u00a0<\/p>\n \n\t\u201cThe federal securities laws are clear that any celebrity or other individual who promotes a crypto asset security must disclose the nature, source, and amount of compensation they received in exchange for the promotion,\u201d said Gurbir S. Grewal, director of the SEC\u2019s Division of Enforcement, in a statement over Kardashian\u2019s settlement.<\/p>\n \n\tBut there\u2019s a ruling challenging the notion that stars can be held liable for their alleged complicity in peddling crypto. On Dec.\u202f7, a federal judge dismissed a lawsuit<\/a> against endorsers of EthereumMax accusing them of fraudulently misleading their millions of followers into buying EMAX tokens, only to sell their own stakes once its value was inflated. While the case raises \u201clegitimate concerns\u201d\u202fover the ability of celebrities to persuade undiscerning followers to buy \u201csnake oil with unprecedented ease and reach,\u201d U.S. District Judge Michael Fitzgerald found that there\u2019s an expectation for \u201cinvestors to act reasonably before basing their bets on the zeitgeist of the moment.\u201d\u00a0<\/p>\n \n\t\u201cThis is a volatile area, and people need to do their own research,\u201d says Daniel Dubin, an attorney at Alston & Bird, who is skeptical that stars face much legal exposure. \u201c[This ruling] sets the right tone for this type of litigation. You don\u2019t want to excuse someone for investing in something they should\u2019ve known to be a bad investment.\u201d<\/p>\n \n\tThe FTX litigation takes a different approach. Moskowitz, the lawyer repping FTX account holders, seeks a court order in a separate class action filed in Florida state court that FTX offered unregistered securities in the form of interest-bearing accounts. A judge will consider the issue through the Howey Test, a standard that emerged in a 1946 Supreme Court case for determining whether a transaction qualifies as an investment contract.<\/p>\n \n\tMax Dilendorf, an attorney specializing in crypto, stresses that FTX\u2019s interest-bearing accounts are securities because they require investment of money into a common enterprise where there\u2019s an expectation of profits from the efforts of third parties. \u201cIf I\u2019m buying something like a digital token or an NFT, I\u2019m buying an investment contract,\u201d Dilendorf says. \u201cThe only reason I\u2019m buying is because I expect a profit.\u201d<\/p>\n \n\tDilendorf stresses the SEC\u2019s stance that most crypto are securities and subject to disclosure and registration requirements, backed up in suits filed by the agency in which courts applied the Howey test. In 2020, a New York federal judge ruled in favor of the SEC in its suit against Kik and found that the company illegally sold unregistered securities through an initial coin offering. The order was followed by an identical ruling in another suit against Telegram, which was forced to surrender $1.2 billion in ill-gotten gains and pay a fine of $18.5 million.<\/p>\n \n\tEven if they didn\u2019t knowingly participate in the alleged scheme, celebrity promoters may be on the hook for damages if it\u2019s found that the exchange sold unregistered securities. The so-called \u201cblue sky\u201d law \u2014 enacted by various states to protect consumers from securities fraud \u2014 that the suit is claiming a violation of is the vehicle that allowed courts to claw back money from investors who profited off of Bernie Madoff\u2019s Ponzi scheme even though they weren\u2019t aware of the fraud. While O\u2019Neal may be trying to distance himself from FTX by saying Dec.\u202f15 that he was \u201cjust a paid spokesperson,\u201d that question will be decided by the courts in pending litigation.<\/p>\n \n\tA version of this story first appeared in the Dec. 16 issue of The Hollywood Reporter magazine.\u00a0Click here to subscribe<\/a><\/em>.<\/p>\n<\/p><\/div>\n !function(f, b, e, v, n, t, s) {
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