FTX’s Celebrity Promoters May Be Liable for Damages

The creator of Seinfeld and Curb Your Enthusiasm, Larry David, is one of several celebrities who have been sued for promoting FTX's services and products.

Source: Bloomberg | Published on November 23, 2022

FTX Bankruptcy

The viral Super Bowl ad for FTX featured multiple versions of a skeptical Larry David. Given the collapse of the cryptocurrency exchange, his fellow celebrities would have done well to take his advice.

The creator of Seinfeld and Curb Your Enthusiasm is one of several celebrities who have been sued for promoting FTX’s services and products. According to the lawsuits, they enticed inexperienced investors into the shambles.

According to legal experts, the celebrities’ celebrity and wealth make them a tempting target for investors looking to recoup some of their losses, as the company and co-founder Sam Bankman-Fried are essentially bankrupt. This month, FTX and more than 100 affiliates declared bankruptcy, shielding them from legal action. The promoters, who are not in bankruptcy court, are not protected in this way.

“A lawsuit against celebrities will generate a lot of money because they’ll all settle,” said John Reed Stark, former director of the Securities and Exchange Commission’s Office of Internet Enforcement. “It’s one thing to make your fans buy your face-printed T-shirt. It’s another thing entirely to promote something that causes them to lose their life savings.”

Since FTX’s demise, at least three lawsuits have been filed, one of which seeks to represent “thousands, if not millions, of consumers nationwide.” Among the defendants are Tom Brady, Gisele Bundchen, Stephen Curry, Shaquille O’Neal, and businessman and TV personality Kevin O’Leary.

If the investors can prove that the celebrities were paid to promote the crypto exchange, had invested in the company, or were selling unregistered securities, the celebrities may be held liable. The lawsuits are currently pending in federal court in Miami and San Francisco.

The stars’ representatives didn’t respond to requests for comment on the lawsuits.

FTX’s sudden collapse cost US investors more than $11 billion, according to the Miami lawsuit filed Nov. 15. The platform, with 5 million users worldwide, traded more than $700 billion of crypto last year.

“The celebrities’ liability hinges mainly on whether the products they promoted are securities,” said Shane Seppinni, who represents people suing over alleged corporate abuse and who isn’t involved in the FTX cases. If FTX’s yield-bearing accounts, which pay interest on crypto holdings, are found to be securities, “then the celebrities who promoted them could be on the hook for big damages,” he said.

To determine whether a given item constitutes a security, courts tend to fall back on the Howey Test. It gets its name from a 1946 Supreme Court decision defining a security as “an investment of money in a common enterprise with profits to come solely from the efforts of others.” If the item in question meets that definition, the court held, then it doesn’t matter “whether the enterprise is speculative or nonspeculative, or whether there is a sale of property with or without intrinsic value.”

The Texas State Securities Board’s director of enforcement, Joseph Rotunda, filed a declaration last month that the yield-bearing accounts are an offering of unregistered securities. And promoting securities without disclosing the source, nature or amount of compensation would violate securities law.

On Monday, Rotunda said his office was scrutinizing the payments the celebrities received and any disclosures made.

“We are taking a close look at them” as part of the regulator’s broader probe into FTX’s failure, he said.

Brady and Bundchen joined the company’s $20 million ad campaign in 2021 and made a commercial — “FTX. You In?” — showing them urging acquaintances to join up. They also took equity stakes in FTX Trading Ltd., according to the Miami complaint.

O’Leary, of ABC’s Shark Tank and CNBC’s Money Court, was both an investor in and a paid spokesman for FTX. He and tennis star Naomi Osaka, who has also been sued, both promoted FTX’s interest-bearing accounts, in which Elliott Lam, a Canadian living in Hong Kong, invested and lost $750,000, according to his proposed class action lawsuit in San Francisco.

David’s comic persona and quirky role in the Super Bowl ad may prove oblique enough to beat the litigation, legal experts said.

The commercial featured him as a skeptic of other inventions, such as the Sony Walkman and, earlier, the wheel. “Don’t be like Larry,” the ad cautioned. It made FTX one of the most retweeted brands during the game, lawyers for the investor in the Miami complaint said.

But the only allegation about the comedian “is that Larry David appeared in a commercial,” said attorney Brian Levin. “I don’t see how that, in and of itself, would give rise to liability.”

Stark, the former SEC internet enforcement chief, finds “the irony” that David played characters in the ad who keep saying no — including to FTX — “glaring.”

“There’s enough celebrities to choose from,” he said. “I’d probably leave him off, so as not to muddy the waters.”

As the impact of FTX’s fall unfolds, more lawsuits are expected to roll in against Bankman-Fried and celebrity endorsers from the US and elsewhere, including South Korea, Singapore and Japan, where many of the investors are based, said attorney Demetri Bezaintes. The law firm that filed the Miami complaint filed another proposed class action suit in South Florida a week later.

This isn’t the first time celebrities have found themselves in hot water over crypto promotions. Kim Kardashian and Floyd Mayweather Jr. were sued in Los Angeles over their promotion of the EthereumMax token. In a tentative ruling on Nov. 7, the judge dismissed the lawsuit, saying the defendants hadn’t promoted the tokens as a security.

Kardashian agreed last month to pay $1.3 million, and not to tout digital assets for three years, to settle SEC claims that she broke the rules by promoting the token without disclosing that she was being paid. Mayweather and music producer DJ Khaled were accused of violating securities laws by failing to disclose payments they received to promote initial coin offerings on social media in 2018. Both settled with the SEC, with Mayweather paying more than $600,000 and Khaled dropping more than $150,000.

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