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FTX Investors Seek Damages from Athletes, A-listers

Will Civil Suits Against Celebrity Spokespersons Prove Fruitful?

By Yusuke Hisashi

Japanese Legal Advisor

Gamma Law, San Francisco, California, United States of America

The fallout from the FTX implosion may transport Steph Curry from the basketball court to the US district court after the filing of a class action lawsuit against the cryptocurrency exchange’s celebrity endorsers. Other high-profile athletes, including Curry’s fellow NBA’er, Udonis Haslem, ex-star Shaquille O’Neal, the NFL’s Tom Brady (and his ex-wife model Gisele Bündchen) and Trevor Lawrence, MLB superstar Shohei Otani and hall of famer David Ortiz, and 4-time Grand Slam tennis champion, Naomi Osaka, have been named to the all-star defendant list along with Hollywood icon Larry David and investor Kevin O’Leary.

The US$11 billion suit alleges that, in putting their stamps of approval on FTX, this pantheon of pop culture is guilty of “misleading [users and investors] and encouraging people to get into their system and invest in the company,” lead plaintiff Edwin Garrison told Fox News. The suit says that the endorsers are, at least, partially “responsible for the many billions of dollars in damages they caused Plaintiff and the Classes and to force Defendants to make them whole” because they “promoted… and actively participated in FTX Trading and FTX US (collectively, the "FTX Entities"), offer and sale of unregistered securities in the form of yield-bearing accounts (YBAs) to residents of the United States."

The success of the lawsuit itself likely hinges upon whether the courts consider that the crypto offered on the FTX exchange assets should be considered and subject to US securities laws. Gamma Law has addressed the arguments for and against treating crypto, NFTs, and other digital assets as securities.

Whether the endorsers will escape culpability in the eyes of the court is another matter entirely. Whilst the civil case could require years to unravel, the Federal Trade Commission (FTC)has made it clear that celebrity spokespersons and paid endorsers are fair game if their statements can be proven false or their actions are fraudulent.

Just as “advertisers are subject to liability for false or unsubstantiated statements made through endorsements, or for failing to disclose material connections between themselves and their endorsers,” the FTC’s “Guides Concerning the Use of Endorsements and Testimonials in Advertising, notes that “Endorsers also may be liable for statements made in the course of their endorsements.”

The FTC explains that even messages that are clearly marketing or promotional statements, consumers will recognize entities endorsing products by their celebrity or profession and “believe the celebrity’s statements represent his own views even though he is reading from a script. The celebrity is subject to liability for his statement about the product.”

So, depending upon the evidence, FTX’s A-list may be in hot water with regulators. There have been several instances where celebrities agreed to pay fines and forfeit payments they received – and failed to disclose – for touting the spurious benefits of everything from diet supplements to real estate courses.

But do plaintiffs stand a chance of recovering their lost fortunes from these stars?

In the most recent high-profile case, Kim Kardashian paid a $1 million fine and disgorged her $250,000 (plus interest) payment she received for touting the Ethereum Max token in a 22-word tweet. Kardashian fully cooperated in the investigation and agreed not to shill for crypto for at least three years. Despite this seeming admission of wrongdoing, she seems to have escaped liability in a civil suit claiming endorsements from her and boxing legend Floyd Mayweather Jr. led plaintiffs to pay “inflated prices” for the tokens in a pump-and-dump scheme. A judge’s tentative ruling indicates he will excuse Kardashian and Mayweather because the plaintiffs’ lawyers are “trying to act like the SEC [but] haven’t chosen to view the tokens as a security.”

The case follows a similar pattern in which the FTC disciplines endorsers, but alleged investors fail to recover damages. Interestingly, Mayweather’s Ethereum Max entanglement comes a little more than three years after he “agreed not to promote any securities, digital or otherwise, for three years,” as part of a 2018 SEC investigation. In that case, Mayweather and music mogul DJ Khaled settled charges that they failed to disclose payments received for promoting three initial coin offerings. The SEC filed criminal charges against one of those ICOs for “fraudulent and unregistered” tokens. The company’s principals pled guilty, were sentenced to prison, and surrendered more than US$40 million in profits and interests. Mayweather paid over US$600,000 and Khaled more than US$150,000 in disgorgement, fines, and interest.

In announcing the settlement, SEC Enforcement Division Co-director Steven Peikin noted that “Investors should be skeptical of investment advice posted to social media platforms and should not make decisions based on celebrity endorsements. Social media influencers are often paid promoters, not investment professionals, and the securities they’re touting, regardless of whether they are issued using traditional certificates or on the blockchain, could be frauds."

The plaintiffs claimed they would not have invested and lost money in the fraudulent ICO had they not been influenced by the celebrities’ enthusiastic endorsement of it, even though neither Khaled nor Mayweather knowingly participated in the fraud.

Still, the boxer and the music producer were quickly dismissed from an investor lawsuit, with the judge in the civil case ruling that the plaintiffs failed to show that they had been influenced by the celebrities’ endorsements, followed them on social media or even saw their tweets and Instagram posts.

Observers are closely watching the FTC’s case against Nudge, LLC and its celebrity spokesmen who made allegedly false claims about the company’s real estate investment training programs. The FTC’s filings say that Dean Graziosi, “a self-described New York Times best-selling author, entrepreneur, and investor,” and Scott Yancey, the star of reality TV’s ‘Flipping Vegas’,  used their influence in advertisements to “draw consumers into attending training seminars that falsely promised to teach consumers a proven formula to make money by investing in real estate.”

The case underscores the FTC’s endorsements and testimonials guidelines’ position that spokespeople can be held liable when they deliver statements that they know or have reason to believe to be false, even if they are simply reading from a script. In this case, the FTC charges that Graziosi and Yancey’s compensation came in the form of commissions based on consumer sales – to the tune of US$10 million each – earned partly from the marketing campaigns that the celebrities helped to devise. Further, according to the FTC, the pair continued to endorse the real estate courses after becoming aware of numerous complaints about misleading claims.

They were instrumental to the scheme and took a cut of the profits,” said Andrew Smith, director of the FTC’s Bureau of Consumer Protection, in explaining the agency’s unusual tactic of including the endorsers in its case.

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