Celebrity Crypto-Hawkers Should Get a Close Look

Remember when the actor Matt Damon pontificated about how “fortune favors the brave” people who invest with Or when the director Spike Lee applauded the digital rebellion championed by Coin Cloud? Since the spectacular collapse of the cryptocurrency exchange FTX, Mr. Damon, Mr. Lee and most other crypto-touting celebrities have largely gone silent — and for good reason.

There was little precedent for the scale and the star power that characterized the deluge of high-profile celebrity endorsements promoting cryptocurrencies. And now crypto values and crypto firms are going bust, leading investors’ savings to tank, too.

As the former chief of the Securities and Exchange Commission’s Office of Internet Enforcement, I believe regulators have some of these celebrity endorsers squarely in their sights and, when appropriate, will pursue them aggressively. Buying a bottle of Gatorade or a Rolex watch shilled by a celebrity probably never put someone’s life savings at risk. But buying into an endorsement of crypto certainly did, and these endorsers’ actions warrant intense scrutiny in the least.

Given the growing crypto-related investor carnage, the S.E.C. and the Department of Justice may step up their efforts. The S.E.C. has already been quite aggressive in its crypto-related enforcement program, filing over 100 enforcement actions and winning all the ones I have reviewed. Both the S.E.C. and the Justice Department have also created special crypto units, each eager to hit the ground running.

Moreover, the timing was not good. Many celebrities touted the life-changing power of crypto investing just as the speculative mania was nearing its peak.

In its recent action against FTX’s founder, Sam Bankman-Fried, the S.E.C. claimed that FTX had co-opted celebrities to promote its brand as a “trustworthy company,” citing Tom Brady, Gisele Bündchen, Stephen Curry, Major League Baseball and the Miami Heat basketball team in investment materials shown to at least one investor. The language suggests that the S.E.C. considers FTX’s use of celebrities to have served as a critical aspect of Mr. Bankman-Fried’s alleged scheme and will most likely investigate the nature of FTX’s celebrity agreements and joint efforts.

Some celebrities may seek protection from the First Amendment. But the First Amendment is not a defense to an allegation of fraud. We don’t know at this point what, if anything, celebrities knew about the firms they were promoting. Whether they can be charged depends on what they knew and when, what questions they asked (if any), the extent of their involvement, the nature of their compensation, the extent that they relied on experts like their legal counsel and any other evidence of their complicity in any potential wrongdoing.

Judges do expect investors to exercise common sense and act reasonably before basing their bets on “the zeitgeist of the moment,” as one judge recently said. But if a celebrity were to facilitate or enable a fraud, that would be another matter.

That’s why celebrity crypto-promoters are not alike from a legal standpoint. Merely appearing in a commercial or smiling for a billboard advertisement seems unlikely to warrant federal prosecution. While both Mr. Curry, the N.B.A. superstar, and Larry David, the comedian, promoted FTX, both made it clear in their ads that they were not experts. (In a funny twist, Mr. David doubted whether investing in FTX made any sense at all.)

More vulnerable to investigation are those celebrities who may have exposed themselves to the possibility that they knew, or were reckless in not knowing, that the crypto firm they had partnered with was allegedly deceiving investors. In several ads Mr. Brady and his then-wife, Ms. Bündchen, didn’t distance themselves in the same way that Mr. Curry and Mr. David did; Ms. Bündchen also served as an environmental and social initiatives adviser for FTX.

Then there are Kevin O’Leary and Mark Cuban, high-profile businessmen who both star on CNBC’s “Shark Tank,” where they evaluate pitches for investment opportunities. Both Mr. O’Leary and Mr. Cuban are famous because of their business savvy, so investors arguably take their endorsements more seriously than other celebrities’.

Mr. O’Leary was paid approximately $15 million to act as an FTX spokesman. In a video reportedly posted to his website shortly before FTX went bankrupt, he said, “If there’s ever a place I could be that I’m not gonna get in trouble, it’s gonna be at FTX.”

Mr. O’Leary recently said that he suffered losses because of FTX’s collapse, but that he will be OK. The same probably cannot be said for any less-fortunate fans who may have risked their life savings after hearing Mr. O’Leary’s crypto-accolades.

Mr. Cuban’s fans may have suffered a similar fate because of the deal between the Dallas Mavericks, the N.B.A. team he owns, and Voyager Digital, a crypto brokerage and lending firm. Unlike, say, a beer sponsorship, the Mavericks/Voyager collaboration was described by its principals as something more akin to a crypto-partnership.

Mr. Cuban said at a news conference announcing the Voyager/Mavericks relationship, “We find it to be a perfect fit for our Mavs fans and Mavs fans of all ages.” He added that “working together we will be at the forefront of innovation. We’re going to come up with new ways to introduce Mavs fans to cryptocurrencies.”

Eight months later, Voyager declared bankruptcy, and shortly thereafter, a group of Voyager customers filed a proposed class-action suit in federal court in Florida against Mr. Cuban, Voyager’s chief executive and the Dallas Mavericks.

What really stings is that the exploited victims of crypto are too often those who cannot afford to lose what they have invested. That’s in part because promoters argued that crypto is a revolutionary equalizer for the unbanked. I believe crypto is actually the opposite and just another example of what scholars have called “predatory inclusion” — in other words, disadvantaged and disaffected communities get access under the auspices of inclusion, but that access can make their situations worse.

Last year, a University of Chicago study found that 44 percent of Americans who owned and were trading crypto were people of color. To make matters worse, a J.P. Morgan Chase study released this month found that people with lower incomes very likely made their crypto purchases when prices were elevated when compared to higher earners and have therefore suffered disproportionately.

And just as payday lender storefronts are often concentrated in Black or Hispanic communities, the same seems to be happening with crypto A.T.M.s (which are also notorious for charging fees that can range from 7 percent to 20 percent per transaction).

When crypto firms like FTX go bankrupt, their customers too often find themselves designated as unsecured creditors, last in line for restitution, with little chance of any recovery. And when regulators and prosecutors conduct the archaeological dig to figure out who is responsible, fame should not provide anyone with a “get out of jail free” card.

John Reed Stark is a senior lecturing fellow at Duke University Law School. From 1998 to 2009 he was chief of the S.E.C.’s Office of Internet Enforcement.

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