American rapper Post Malone performs during the Rock in Rio music festival in Rio de Janeiro, Brazil, on Sept. 4, 2022.
Bruna Prado, Associated Press
Celebrity endorsements have been a thing for years but a slew of appearances by A-list stars shilling relatively new cryptocurrencies and NFTs while the markets were roaring has come back around as values have tanked and disgruntled investors are seeking legal redress for feeling duped.
Now, many of those celebrities, some of whom struck multimillion-dollar endorsement deals, are finding themselves involved in lawsuits as co-defendants alongside the companies that hoped to leverage star power to drive interest in their products.
Federal regulators are also scrutinizing the promotional deals and, in some cases, issuing fines for disclosure failures.
A group of investors in the failed cryptocurrency exchange FTX named a slew of star endorsers in an action filed in November 2022. They include Larry David, Tom Brady, Giselle Bundchen, Steph Curry, Shaquille O’Neal, Naomi Osaka and others.
According to the Hollywood Reporter, plaintiffs in the case claim FTX operated like a “Ponzi scheme” that used funds obtained through new investors to pay off old investors and maintain the appearance of liquidity. The suit claims that FTX’s interest-bearing accounts were securities, which would obligate promoters to disclose compensation from the company.
Another suit filed in December against Yuga Labs, the parent company of NFT series Bored Ape Yacht Club, claims the company engaged in a conspiracy with celebrities to defraud potential investors, according to a report from Variety.
In the complaint, filed Dec. 8 in federal district court in Los Angeles, Yuga partners are named among the 37 defendants, who include Kevin Hart, Gwyneth Paltrow, Madonna, Justin Bieber, Serena Williams, Jimmy Fallon, Paris Hilton, Snoop Dogg, The Weeknd, Post Malone and Curry. Also named is Amy Wu, who recently exited troubled cryptocurrency exchange FTX and served as a consultant and board member of the ApeDAO, per Variety.
According to The Wall Street Journal, plaintiffs in the Yuga and FTX cases make a mix of claims, some under federal law and others brought under state laws that impose a range of legal requirements on the promotion of financial products. Some lawsuits also have cited state laws prohibiting unfair business practices.
Per rules overseen by the U.S. Securities and Exchange Commission, endorsers of products it considers securities must disclose the nature, scope and amount of compensation they receive. But, per the Journal, outside of case-by-case enforcement actions, the commission hasn’t specifically articulated its views on what digital assets fall under these obligations, leaving the legal landscape uncertain, lawyers say.
“The SEC hasn’t shared its view on most if not all of the most widely traded tokens,” lawyer Philip Moustakis, a partner at Seward & Kissel LLP, told The Wall Street Journal. “If they had done that, there would be far more clarity for investors and far more clarity for the markets.”
While the regulatory waters remain murky when it comes to celebrity endorsements of new digital assets like crypto and NFTs, or non-fungible tokens, the SEC has levied fines against a few superstars for failing to meet reporting requirements.
Last fall, the SEC charged Kim Kardashian for endorsing on Instagram digital token creator EthereumMax without disclosing a $250,000 payment she received for the promotion. She settled the case for $1.3 million, according to the Hollywood Reporter. The same report noted DJ Khaled and boxer Floyd Mayweather Jr. have resolved similar suits filed by the SEC over failing to disclose payments they received for promoting investments in an initial coin offering.
In December, a federal judge dismissed a proposed class-action lawsuit by investors against the founders of the cryptocurrency EthereumMax, as well as celebrity endorsers, including Kardashian and Mayweather, over their promotion of the cryptocurrency on social media, according to CNBC.
Investors who bought EMAX tokens alleged they had suffered losses after taking the word of the celebrity influencers about the value of the crypto and that defendants engaged in a conspiracy to artificially inflate the value of the EMAX tokens.
U.S. District Judge Michael Fitzgerald wrote that he recognized that the lawsuit’s claims raised legitimate worries about “celebrities’ ability to readily persuade millions of undiscerning followers to buy snake oil with unprecedented ease and reach,” per CNBC.
“But while the law certainly places limits on those advertisers, it also expects investors to act reasonably before basing their bets on the zeitgeist of the moment.”
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