FTX’s viral Super Bowl ad featured multiple versions of a deeply skeptical Larry David. In light of the cryptocurrency exchange’s collapse, his fellow celebrities might have done well to heed his advice.
The creator of Seinfeld and Curb Your Enthusiasm is among the slew of stars being sued for promoting FTX’s services and products. The lawsuits allege they lured unsophisticated investors into the debacle.
Legal experts say the celebrities’ prominence and wealth make them a juicy target for investors looking to recover some of their losses, with the company and co-founder Sam Bankman-Fried essentially broke. FTX put itself and more than 100 affiliates into bankruptcy proceedings this month, shielding them from suits. The promoters, who aren’t in bankruptcy court, have no such protection.
“A lawsuit against celebrities will generate a ton of money, because they will all settle,” said John Reed Stark, former chief of the US Securities and Exchange Commission’s Office of Internet Enforcement. “It’s one thing to make your fans buy your T-shirt with your face on it. It’s another to tout something that causes them to lose their life savings.”
At least three lawsuits have been filed since FTX’s implosion, including one that seeks to represent “thousands, if not millions, of consumers nationwide.” Tom Brady, Gisele Bundchen, Stephen Curry, Shaquille O’Neal and businessman and TV personality Kevin O’Leary are also among the defendants.
The celebrities could be liable if the investors can prove they failed to disclose that they were being paid to promote the crypto exchange or had invested in the company, or were hawking unregistered securities. The pending lawsuits are in federal court in Miami and San Francisco.
The stars’ representatives didn’t 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 5 million users worldwide, traded more than $700 billion of crypto last year.
“The celebrities’ liability hinges mainly on whether the products they promoted are securities,” said Shane Seppinni, who represents people suing over alleged corporate abuse and who isn’t involved in the FTX cases. If FTX’s yield-bearing accounts, which pay interest on crypto holdings, are found to be securities, “then the celebrities who promoted them could be on the hook for big damages,” he said.
To determine whether a given item constitutes a security, courts tend to fall back on the Howey Test. It gets its name from a 1946 Supreme Court decision defining a security as “an investment of money in a common enterprise with profits to come solely from the efforts of others.” If the item in question meets that definition, the court held, then it doesn’t matter “whether the enterprise is speculative or nonspeculative, or whether there is a sale of property with or without intrinsic value.”