FTX’s viral Super Bowl ad featured several versions of the deeply skeptical Larry David. In light of the cryptocurrency exchange crash, his fellow celebrities might have done well to heed his advice.
The creator of Seinfeld and Curb your enthusiasm is among several stars sued for promoting FTX’s services and products. The lawsuits allege they lured unsolicited investors into the failure.
Legal experts say the celebrities’ fame and wealth make them a juicy target for investors looking to recoup some of their losses, with the company and co-founder Sam Bankman-Fried essentially bankrupt.
FTX put itself and more than 100 affiliates into bankruptcy proceedings this month, shielding them from lawsuits. Non-bankruptcy promoters have no such protection.
“A celebrity lawsuit is going to generate a lot of money because they’re all going to settle,” said John Reed Stark, former chief of the U.S. Securities and Exchange Commission’s Office of Internet Enforcement.
“It’s one thing to get your fans to buy your T-shirt with your face on it. It’s another to advertise something that causes them to lose their savings.”
At least three lawsuits have been filed since the FTX collapse, including one that seeks to represent “thousands, if not millions, of consumers across the country.”
Tom Brady, Gisele Bundchen, Stephen Curry, Shaquille O’Neal and businessman and TV personality Kevin O’Leary are also among the defendants.
Celebrities can be held liable if the investors can prove they failed to disclose that they were paid to promote the cryptocurrency exchange or invested in the company or sold unregistered securities.
The pending cases are in federal court in Miami and San Francisco.
Representatives for the stars did not 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 five million users worldwide, traded over $700 billion in cryptocurrency last year.
“The liability of celebrities depends primarily on whether the products they’re promoting are securities,” said Shane Seppini, who represents people suing for alleged corporate malfeasance and who is not involved in the FTX cases.
If lucrative FTX accounts that pay interest on cryptocurrency holdings are found to be securities, “then the celebrities who promoted them could be on the hook for major damages,” he said.
To determine whether an item constitutes collateral, courts tend to fall back on the Howey test.
Its name derives from a 1946 Supreme Court decision that defined a security as “an investment of money in a general enterprise with profits that derive solely from the efforts of others.”
If the item in question meets that definition, the court ruled, then it doesn’t matter “whether the enterprise is speculative or non-speculative, or whether there is a sale of property with or without intrinsic value.”
The director of enforcement for the Texas State Securities Board, Joseph Rotunda, filed a declaration last month that the yield-bearing accounts were unregistered securities offerings. And advertising securities without disclosing the source, nature, or amount of compensation would violate securities law.
On Monday, Mr. Rotunda said his office was looking closely at payments received by celebrities and any disclosures made.
“We are looking at them carefully” as part of the regulator’s wider investigation into the FTX failure, he said.
Brady and Bundchen joined the company’s $20 million advertising campaign in 2021 and ran an ad — “FTX. Are you in?” — showing them urging acquaintances to join in. They also took stakes in FTX Trading, according to the Miami complaint.
ABC’s O’Leary Shark aquarium and CNBC Money courtwas both an investor and paid spokesperson for FTX.
He and tennis star Naomi Osaka, who was also sued, advertised the interest-bearing FTX accounts in which Elliott Lam, a Canadian living in Hong Kong, invested and lost $750,000, according to his proposed class action in San Francisco.
David’s comedic personality and quirky role in the Super Bowl ad may prove indirect enough to defeat the lawsuit, legal experts said.
The ad portrays him as a skeptic of other inventions, such as the Sony Walkman and earlier the wheel.
“Don’t be like Larry,” the ad warned. That made FTX one of the most retweeted brands during the game, the investor’s lawyers said in the Miami complaint.
But the only claim about the comedian “is that Larry David appeared in an ad,” said attorney Brian Levine. “I don’t see how that in itself would give rise to liability.”
Mr Stark, a former head of internet enforcement for the SEC, found the “irony” of David playing characters in the ad who continue to say no – including to FTX – to be “glaring”.
“There are enough celebrities to choose from,” he said. “I’d probably leave it so as not to muddy the waters.”
As the impact of FTX’s fall unfolds, more lawsuits are expected to emerge against Mr Bankman-Fried and prominent figures from the US and elsewhere, including South Korea, Singapore and Japan, where many of the investors are based, a lawyer said Demetri Bezaintes.
The law firm that filed the complaint in Miami filed another proposed class action 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 for promoting the EthereumMax token.
In a preliminary ruling on Nov. 7, the judge dismissed the case, saying the defendants did not promote the tokens as collateral.
Kardashian agreed last month to pay $1.3 million and not advertise digital assets for three years to settle SEC allegations that she violated 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 losing more than $150,000.
Updated: November 24, 2022, 8:00 a.m