Superstar celebrities like NFL quarterback Tom Brady and comedian Larry David are facing lawsuits for endorsing failed cryptocurrency exchange FTX. What can we learn from the cases? Due diligence is important and the now infamous FTX ad was right – “Stephen Curry is not a crypto expert.”
Back in December, in the wake of the FTX crypto exchange collapse, lawyers filed a class action lawsuit against former FTX CEO Sam Bankman-Fried and a host of celebrities like Brady and David. The complaint argues that the celebrities, in lending their credibility to the failed cryptocurrency exchange, were “responsible for the many billions of dollars in damages they caused.”
Unlike Bankman-Fried, who was arrested and charged with multiple counts of wire fraud and money laundering for siphoning off customer funds for risky investments and campaign contributions, at least 11 celebrity endorsers have been wrapped up in the FTX drama without facing jail time. These celebrity endorsers include supermodel Gisele Bündchen, NBA star Stephen Curry, tennis phenom Naomi Osaka, former baseball superstar David “Big Papi” Ortiz, and Shark Tank’s Kevin O’Leary. They are all implicated for appearing in paid advertising campaigns and endorsing the exchange.
The complaint specifically argues that FTX’s customers, through engaging with the FTX platform, were buying and selling “unregistered securities,” regulated by the Securities Exchange Commission (SEC). Therefore, Brady and the other celebrity endorsers were required to reveal the details of their financial agreements with FTX. The plaintiffs allege that these celebrities violated Florida securities and consumer-protection laws by failing to provide specific information on their financial arrangement with FTX, in addition to not undergoing requisite due diligence before promoting the company.
In one ad campaign for FTX, Brady and ex-wife Bundchen were featured as an enthusiastic Brady called up friends to pitch crypto trading on FTX – akin to recruiting buddies to come play football with him – asking again and again: “Crypto. FTX. You in?”
As such, the FTX case isn’t only interesting because of the criminal charges against Bankman-Fried. It could also set a precedent for celebrities being legally responsible for the products and services they endorse. Let’s break down this argument based on the legal precedent that already exists today.
The complaint alleges that FTX accounts were securities based on SEC v. Howey, a 1946 Supreme Court case that involved two Floridians who invested in real estate contracts for tracts of land with orange groves. The Supreme Court held that the contracts were securities because they were "a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party." The men were not farmers so could not influence the outcome of the venture and thus relied on the promoters, or a third party, for profits. If FTX interest-bearing accounts are determined to be securities, the celebrities would have a higher standard of care when endorsing the product including financial disclosure requirements.
The question of whether or not certain cryptocurrencies are securities under Howey is a major issue roiling the cryptocurrency industry as well as Congress and financial regulators across the executive branch. While the plaintiffs in the case against FTX have asked the court to decide the securities issue up front, even if the judge rules that FTX interest-bearing accounts were not securities, the plaintiffs intend to proceed under a strict Florida consumer protection law. The consumer protection law bans “unconscionable, deceptive, or unfair acts or practices in the conduct of any trade or commerce.”
Thus, the FTX lawsuit begs a fundamental and interesting question: Are celebrities liable for endorsing a product that causes harm?
What is the requisite due diligence required of basketball star Shaquille O’Neil or Jacksonville QB phenom Trevor Lawrence, both FTX endorsers named in the suit? What should have been the due diligence process prior to promoting a brand that adorned the facade of the Miami Heat’s arena and F1 cars prior to the company’s bankruptcy?
This is not the first time celebrity endorsers have been sued for promoting a cryptocurrency-related product.
In December 2022, a federal judge in California dismissed a lawsuit from investors accusing Kim Kardashian, boxer Floyd Mayweather Jr. and others of endorsing a cryptocurrency known as EthereumMax (EMAX). Kardashian and the other celebrities agreed to pay millions in fines to the SEC for failing to disclose that they had been paid to endorse the EMAX token.
SEC Chair Gary Gensler, who had warned against celebrity-backed ICOs in 2017, weighed in by saying that “when celebrities or influencers endorse investment opportunities, including crypto asset securities, it doesn’t mean that those investment products are right for all investors.”
The law requires celebrities to disclose to the public when and how much they are paid to promote investing in securities. However, despite the SEC fines and admonishment, the court ruled that Kardashian was not liable. Instead, the court dismissed the case, ruling that investors should “act reasonably before basing their bets on the zeitgeist of the moment.” Admittedly, there is not much case law on celebrity endorser liability, so Brady and company may make legal precedent. That said, the Federal Trade Commission (FTC) has been the go-to federal false advertising regulator.
There are essentially two primary federal agencies that regulate in the false advertising space – the SEC, if the matter involves securities, and the FTC, which is generally responsible for regulating false advertising and deceptive trade practices. FTC regulations make it clear that a celebrity endorser can be held liable for making false statements during the course of an endorsement.
In order to hold the celebrity endorser liable, he or she would probably need to have knowledge of the false and misleading statement at the time it is made. The FTC actually provides a helpful example in recent guidance: “The celebrity is subject to liability for his statement about the product. The advertiser is also liable for misrepresentations made through the endorsement.”
In one case, following consumer complaints, the FTC sued ex-baseball star Steve Garvey, arguing that his claims about the weight loss supplements “Fat Trapper” and “Exercise in a Bottle”were seriously misleading. Furthermore, they alleged that as a celebrity endorser, he was a direct participant in the deceptive advertising and therefore could be held liable for any false statements made during the advertisement. When Enforma agreed to pay a $10 million settlement to the FTC, the court ruled in favor of Garvey, stating that he could not be held liable as a direct participant because he did not have actual knowledge of any material misrepresentations. Generally, the FTC is more concerned with the advertiser than a celebrity endorser.
Did Larry David know that SBF was commingling funds or about Alameda’s stake in FTX-issued FTT tokens? That would be difficult to believe, let alone prove by a preponderance of the evidence – the standard in a civil action. So, like much else in cryptocurrency regulation these days, the FTX lawsuits may hinge on whether or not FTX’s interest bearing accounts were securities.
No matter what the court decides, this case will create a wide ranging impact on the cryptocurrency industry more broadly. 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 being held liable by the courts, there are lessons to be learned for celebrity endorsers. As former Director of the Consumer Financial Protection Bureau (CFPB) Kathy Kraninger explained to me, “Consumers and investors should always do their research and approach advertising with a skeptical eye. As you saw in the recent dismissal of the EthereumMax class action, it can be challenging to bring these cases under U.S. law.” Kraninger, now Vice President of Regulatory Affairs for Solidus Labs, continued, “At the same time, that doesn't let celebrities off the hook. Just as investors need to be skeptical and do their research, celebrities should do their due diligence as well.”
Thus one thing that is certain – celebrity endorsers are more likely to pause before signing up to promote a product they know nothing about. Even winning a case is less desirable than never being taken to court to start with. That hassle might be avoided with a little research.
In other words - as the now infamous FTX Super Bowl ad warns us – “Don’t be like Larry.”
