Investor losses lead to legal action against celebrities who endorse crypto and NFTs

Featuring cartoon portraits of bored apes, Madonna praised non fungible tokens, or NFTs. FTX, which collapsed suddenly in November, was endorsed by Tampa Bay Buccaneers quarterback Tom Brady. EMAX tokens are also a hot topic on Instagram, as Kim Kardashian posted.

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Their alleged duping of the investing public has led to civil lawsuits from investors who lost money on virtual assets, as well as scrutiny from regulators. As a result of the legal actions, some agents have warned their clients against financial endorsements, having a ripple effect on crypto promotions, as well as the hurdles investors must overcome when investing in crypto.

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In the cryptocurrency space, Tibor Nagy Jr., who represents both plaintiffs and defendants, explains that promoting a company and promoting its securities are not the same thing. The next few months should bring clarification and judicial guidance on celebrities' rights."

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During the massive bull run in crypto, celebrity promoters became increasingly popular in 2021. The largest marketing event of the year, the Super Bowl, featured celebrity crypto ads last year.

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Several proposed class-action suits have been filed by attorney Sean Masson of law firm Scott + Scott, who claims that celebrities were compensated just for touting a token without realizing they had legal obligations under federal and state rules regarding endorsements and compensation.

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People are attracted to the fast, easy money floating around, according to Mr. Masson.

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A lawsuit he filed in December targeted non fungible tokens maker Yuga Labs. Madonna and a half-dozen other celebrities are also named defendants in the suit. According to the lawsuit, they induced investors to purchase Bored Ape Yacht Club NFTs at artificially inflated prices without disclosing that they were compensated for their efforts.

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According to the lawsuit, Madonna received a Bored Ape Yacht Club NFT valued at nearly a half-million dollars as compensation in March after posting pictures of an ape NFT on Twitter. According to the lawsuit, she later promoted the NFTs in media interviews with the statement "I was hellbent on getting an Ape."

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She paid for her ape NFT, according to a Madonna representative. According to a Yuga Labs spokesperson, the lawsuit's allegations are unfounded. The representative said that no one has ever been paid to join the club, whether they are famous or not.

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According to a Florida federal lawsuit, Mr. Brady and others promoted the defunct crypto exchange FTX in a way that led consumers to invest in unregistered securities on the platform.

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David Boies, who represents plaintiffs, said that everyone thought it was safe because of promotions.

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The lawsuit alleges that the defendant celebrities failed to disclose specific information about their compensation for promoting FTX products when they disclosed their FTX partnerships. In addition to failing to comply with due diligence, they were also accused of failing to promote FTX products in a timely manner.

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It was not possible to get a comment from a lawyer for Mr. Brady.

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There are a mixed bag of claims filed in the new batch of lawsuits, some under federal law, others under state law that requires financial product promotions to follow certain legal requirements. Unfair business practices have also been cited in some lawsuits.

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Celebrities promoting virtual tokens that the Securities and Exchange Commission considers securities must disclose the nature, scope, and amount of compensation they receive. Legal experts say that the commission has not explicitly stated its view on what digital assets fall under these obligations outside of case-by-case enforcement actions.

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The SEC hasn't provided its views on the majority of tokens currently traded, according to lawyer Philip Moustakis at Seward & Kissel LLP. It would have made the markets and investors much more clear if they had done that."

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To determine if digital assets are securities, the SEC has published a framework.

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There haven't been any notable rulings in most cases, which were filed relatively recently. Ms. Kardashian and other celebrities had been sued in a proposed class action lawsuit, but a federal judge in California dismissed it, saying the plaintiffs had not sufficiently alleged that celebrity promoters conspired with others to increase digital token values.

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There are legitimate concerns raised by this action regarding celebrities' ability to persuade millions of undiscerning followers to purchase snake oil with unprecedented ease and reach," United States Magistrate Judge Michael Fitzgerald wrote. Even though the law limits those advertisers, investors are also expected to act reasonably before putting their money at risk based on the zeitgeist."

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As a result of the "well-reasoned ruling," Ms. Kardashian's lawyer, Michael Rhodes, expressed satisfaction.

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In the suit, defendants argued that celebrity promotion had not been relied upon by investors. A court brief filed by Ms. Kardashian states that no plaintiff alleges they viewed either Instagram post before purchasing Tokens during the relevant time period.

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Plaintiffs amended their complaint with the judge's permission.

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Celebrity endorsements of financial products posed potential risks before the crypto bust, and some financial firms themselves weren't enthusiastic about them.

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Tony Mulrain, co-chair of Holland & Knight's sports law practice, said there are many guardrails when dealing with money. In order to persuade your fans to buy a certain brand of bleach, the rules are less strict than if someone invested their entire life savings into a security based on the recommendation of someone they admire and respect.

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There are many other product categories with marketing opportunities without the same risks, according to sports agent Leigh Steinberg, who has represented Kansas City Chiefs quarterback Patrick Mahomes. It is possible to do a powerful portfolio of marketing agreements without ever getting involved in more hazardous areas," he said.