During Super Bowl LVI, viewers—many of whom tune-in in anticipation of the latest memorable advertisements that have become inextricably linked to the event itself—found many of the world’s most recognizable celebrities confronting them with one question: why weren’t they investing in crypto? Matt Damon, appearing on behalf of Crypto.com, sought to allay the concerns of nervous would-be investors (or perhaps scold, disinterested skeptics) by proclaiming that “fortune favors the brave.” LeBron James, also appearing on behalf of Crypto.com, told a younger version of himself that he would need to “call his own shots” if he wanted to “make history.” Larry David, appearing on behalf of FTX, played the role of history’s perpetual reactionary, summarily dismissing inventions such as the wheel, fork, and light bulb as useless, before rejecting crypto with the tongue-in-cheek confidence that he was “never wrong about this stuff.” And of course, Coinbase simply allowed a colorful QR code to bounce around the screen with no additional explanation.
Even at that time, the advertisements and their underlying marketing tactics did not escape criticism. U.S. Senator Sherrod Brown (D-Ohio), chairman of the Senate Banking Committee, lambasted them as “desperate” ploys to reel in new customers with “celebrities and gimmicks” by companies simply seeking to earn huge profits. Brown noted that the ads neglected to mention “frauds, scams, and outright theft” in favor of “mak[ing] crypto sound exciting and daring and profitable[.]” In the wake of the collapse in crypto assets that soon followed, the commercials have become little more than punchlines.
One group of investors, however, is seeking to hold crypto’s celebrity advocates personally liable for their roles in convincing consumers to enter the crypto market. Edwin Garrison, an Oklahoma resident, alleges that he purchased an unregistered security in the form of a yield-bearing account (“YBA”) from FTX and funded the account with “sufficient amount[s] of crypto assets to earn interest on his holdings … after being exposed to some or all of Defendants’ misrepresentations and omissions regarding the Deceptive FTX Platform[.]” FTX, formerly one of the world’s largest crypto exchanges—at one time valued between $30-$40 billion—spectacularly collapsed over the course of several days in November 2022, wiping out billions in customer assets. Amidst allegations that he intentionally diverted customer funds from FTX to his crypto trading firm, Alameda Research, FTX founder Sam Bankman-Fried was indicted by federal prosecutors a month later on charges of fraud, money laundering, and campaign finance violations. Before the House Financial Services Committee, John J. Ray III, who succeeded Bankman-Fried as CEO of FTX, denounced Bankman-Fried and his associates as “grossly inexperienced and unsophisticated individuals who failed to implement virtually any of the systems or controls that are necessary for a company that is entrusted with other people’s money or assets.” As an example of such practices, Ray specifically pointed out the ability of Alameda Research to borrow funds held at FTX for its own trading and investment purposes “without any effective limits[.]”.
Garrison’s complaint names Bankman-Fried as a defendant; however, the complaint is not limited to the firm’s founder, going on to name a number of celebrities and athletes as co-defendants. In addition to David, the complaint alleges causes of action against stars such as Tom Brady, Gisele Bundchen, Shaquille O’Neal, Naomi Osaka, Shohei Ohtani, Trevor Lawrence, David Ortiz, “Shark Tank” star Kevin O’Leary, and Stephen Curry (as well as Curry’s employer, the Golden State Warriors). Garrison alleges that these athletes and celebrities “controlled, promoted, assisted in, and actively participated in” FTX’s scheme to sell customers unregistered securities in the form of YBAs. The list of co-defendants named in Garrison’s complaint illustrates the extent to which FTX ingratiated itself within the U.S. professional sports circuit. In addition to the array of athletes who endorsed and promoted FTX, the exchange entered into a $135 million agreement with Miami-Dade County for the naming rights to FTX Arena, home of the Miami Heat; a $17.5 million dollar agreement with UC Berkeley for the naming rights to its football stadium, FTX Field at California Memorial Stadium; and, in what was billed as “the first-ever partnership between a professional sports league and a cryptocurrency exchange,” a partnership with Major League Baseball and the MLB Players Association, whereby FTX was granted group player rights and the right to create the first-ever uniform patch for umpires. In the wake of FTX’s bankruptcy, MLB commissioner Rob Manfred called the experience “jarring” and warned of the need for caution in the future.
Garrison’s complaint centers on what he alleges was the co-defendants’ violation of anti-touting provisions within federal securities law. While the co-defendants disclosed their partnership with FTX, which Garrison acknowledges, he alleges that they failed to disclose the nature, scope, and amount of compensation that they received from FTX, and further alleges that they failed to conduct any due diligence prior to promoting FTX products. In support of his complaint, Garrison notes SEC action taken against celebrities in relation to the promotion of other crypto entities; for example, in October 2022, Kim Kardashian agreed to settle charges alleging that she violated federal anti-touting provisions by agreeing to promote EthereumMax’s EMAX tokens on Instagram in exchange for $250,000. While Kardashian admitted no wrongdoing, she agreed to pay over $1 million in penalties, disgorgement, and interest. Four years earlier, the SEC brought similar charges against Floyd Mayweather and DJ Khaled, alleging that they failed to disclose payments that they received for promoting initial coin offerings (ICOs) from multiple issuers. Like Kardashian, neither admitted any wrongdoing, but both agreed to pay hundreds of thousands of dollars in penalties, disgorgement, and interest. Following Kardashian’s settlement, SEC chairman Gary Gensler warned that the case should “serve[] as a reminder to celebrities and others that the law requires them to disclose to the public when and how much they are paid to promote investing in securities[.]” Garrison, who filed suit in the Southern District of Florida, also noted the decision of the Eleventh Circuit Court of Appeals in Wildes v. BitConnect International PLC, 25 F.4th 1341(11th Cir. 2022) . In Wildes, the court held that broadly disseminated communications, such as online videos, created with the purpose of soliciting the sale of securities for financial gain, could expose the promoter(s) to liability, “whether that solicitation was made to one known person or to a million unknown ones.” Wildes, 25 F.4th at 1347. In Wildes, promoters of what the court referred to as a “pyramid-on-Ponzi scheme” created promotional videos designed to draw in new investors—for example, a digital course entitled “Cryptocurrency 101” designed to teach investors how to create a BitConnect account and transfer Bitcoin into it—for which they earned commission. Id. at 1343—44.
It is clear that cryptocurrency exchanges have invested substantial amounts of money in using celebrities to help bring their product to new, more casual, consumers—above all, sports fans. Perhaps the spectacular collapse of FTX will, as MLB commissioner Rob Manfred claimed, inspire renewed caution and skepticism when approaching cryptocurrency. However, the likelihood that celebrities and athletes will continue to leverage their fans’ trust and support into cryptocurrency investments which they are paid to solicit remains ever-present. Rather than rely on piecemeal SEC enforcement actions against individual promoters, perhaps Garrison v. Bankman-Fried, et al will establish a new rule of individual liability to consumers on a class-action scale.