The Fall of FTX & Celebrity Endorsement Involvements
Celebrities such as Tom Brady the NFL quarterback and Larry David, the comedian found themselves entangled in legal battles for endorsing the failed cryptocurrency exchange FTX. The fallout from the collapse of FTX has led to a class action lawsuit, with the plaintiffs arguing that the various celebrities, including Gisele Bündchen, Stephen Curry, Naomi Osaka, David Ortiz, and Kevin O’Leary, bear responsibility for the substantial financial damages caused by their endorsement.
FTX fraud case
The lawsuit specifically alleges that FTX’s customers engaged in transactions involving unregistered securities, that are regulated by the Securities Exchange Commission (SEC). Consequently, Brady as well as the other endorsers were obligated to disclose the financial agreements they had with FTX. The plaintiffs contend that the celebrities violated some Florida consumer protection and securities laws. They did so by not providing adequate information about their financial arrangements and not conducting the required due diligence before deciding to promote the exchange.
SEC and FTC
In the realm of false advertising, two federal agencies regulate such matters. The SEC for securities while the Federal Trade Commission (FTC) for general deceptive practices and false advertising. The FTC holds celebrity endorsers liable for making any false statements while making endorsements, provided they knew the misinformation when they were making the endorsements.
The legal foundation for the lawsuit stems from SEC v. Howey, a landmark Supreme Court case from 1946, which established a test to determine if certain transactions qualify as securities. The Howey Test requires that a transaction involves “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 plaintiffs argue that FTX’s interest-bearing accounts meet the criteria of securities under the Howey Test, potentially holding the celebrity endorsers to a higher standard of care, including the requirement for financial disclosure.
Other endorsement suits
The FTX fraud case isn’t the first instance of celebrity endorsers facing legal consequences for promoting cryptocurrency-related products. In 2022, Kim Kardashian, Floyd Mayweather Jr., as well as others were accused of endorsing the cryptocurrency EthereumMax (EMAX) without disclosing that they were paid for their endorsements. While the celebrities agreed to pay fines to the SEC, the court decided to dismiss the lawsuit, ruling that the investors should exercise reasonable judgment before forming their decisions solely on celebrity endorsements.
Impact on cryptocurrency
The outcome of the FTX fraud case could have significant implications for the cryptocurrency industry. It may set a precedent for the legal accountability of celebrities when endorsing products and services, particularly those that involve securities. While the court’s ruling will determine the liability of the celebrities in this specific FTX fraud case, there are valuable lessons for celebrity endorsers. Consumers and investors should approach advertising with skepticism and conduct their own research before making decisions. Celebrities, too, should exercise due diligence and thoroughly investigate the products they endorse to avoid potential legal complications. In the ever-evolving landscape of cryptocurrency regulation, the FTX lawsuits underscore the importance of adhering to the law and conducting thorough due diligence, both for cryptocurrency companies and celebrity endorsers.