The U.S. Securities and Exchange Commission (“SEC”) announced charges against a “crypto asset entrepreneur” and a handful of celebrities in connection with an alleged crypto scheme. In a complaint and a number of orders released on Wednesday, the SEC revealed that it has charged Justin Sun and three of his wholly-owned companies – Tron Foundation Limited, BitTorrent Foundation Ltd., and Rainberry Inc. (formerly BitTorrent) – for engaging in “the unregistered offer and sale of crypto asset securities Tronix (‘TRX’) and BitTorrent (‘BTT’),” as well as for “fraudulently manipulating the secondary market for TRX through extensive wash trading” and for “orchestrating a scheme to pay celebrities to tout TRX and BTT without disclosing their compensation.”
The SEC alleges in the 50-page complaint that it filed with U.S. District Court for the Southern District of New York on Wednesday that beginning in August 2017 and continuing thereafter, Sun and his companies engaged in “a scheme to distribute billions of TRX and BTT to the public, while also creating active secondary markets on which TRX and BTT could be traded.” While they “offered and sold TRX and BTT as securities and were thus required to register those offers and sales with the SEC unless an exemption from registration was available, they never did so,” according to the agency. At the same time, Sun also “directed the manipulative wash trading of TRX” by enlisting the employees at his companies to make “hundreds of thousands of TRX wash trades between accounts that Sun ultimately controlled.
“None of those trades involved any change in beneficial ownership or had any legitimate economic purpose,” the SEC asserts, and instead, they helped to “create the artificial appearance of legitimate investor interest and keep TRX’s price afloat.”
In addition to these wash trades, Sun and his companies aimed to drive public interest in TRX and BTT by paying celebrities – from Jake Paul and Lindsay Lohan to Akon and Lil Yachty – to promote TRX and BTT on their social media accounts. “Although the celebrities were paid to promote TRX and BTT, their touts on social media did not disclose that they had been paid or the amounts of their payments,” per the SEC. As a result, “The public was misled into believing that these celebrities had unbiased interest in TRX and BTT and were not merely paid spokespersons.” (Note: As distinct from the Federal Trade Commission’s disclosure rules, federal securities laws are “clear that any celebrity or other individual who promotes a crypto asset security must disclose the nature, source, and amount of compensation they received in exchange for the promotion,” Gurbir S. Grewal, Director of the SEC’s Division of Enforcement, previously stated.)
The issues with this promotional scheme went further, the SEC claims, as “Sun materially misrepresented the truth about the touting campaign to deceive investors,” as in February 2021, he “stated falsely on social media, ‘If any celebrities are paid to promote TRON, we require them to disclose.’” The problem: Sun, himself, “arranged the payments to celebrities and knew those payments were not disclosed.”
The full list of celebrity defendants: Actress Lindsay Lohan, social-media personality Jake Paul, musician DeAndre Cortez Way (also known as Soulja Boy), musician Austin Mahone, adult actress Michele Mason (known as Kendra Lust), musician Miles Parks McCollum (known as Lil Yachty), musician Shaffer Smith (also known as Ne-Yo), and musician Aliaune Thiam (also known as Akon). The agency revealed on Wednesday that with the exception of Soulja Boy and Mahone, the celebrity defendants agreed to pay a collective $400,000 in disgorgement, interest and penalties to settle the charges, “without admitting or denying the SEC’s findings.”
With the foregoing in mind, the SEC claims that by offering up and selling the BTT and TRX crypto (via unregistered offers and sales), Sun and his companies violated Section 5 of the Securities Act, which requires all issuers to register non-exempt securities. The Commission also alleges that Sun violated the antifraud and market manipulation provisions of the federal securities laws by orchestrating a scheme to “artificially inflate the apparent trading volume of TRX in the secondary market.”
The agency is seeking injunctive relief in order to permanently bar Sun and his companies from violating the Security and Exchange Acts, and to prevent Sun from acting as an officer or director of any issuer that has securities. The SEC is also looking for the defendants, including Soulja Boy and Mahone, to be jointly and severally disgorged of “all of the ill-gotten gains that they received from the violations alleged herein, plus prejudgment interest,” and to be ordered to pay civil monetary penalties.
In a statement in connection with the complaint, Grewal said, “While we’re neutral about the technologies at issue, we’re anything but neutral when it comes to investor protection. As alleged in the complaint, Sun and others used an age-old playbook to mislead and harm investors by first offering securities without complying with registration and disclosure requirements and then manipulating the market for those very securities.” This is “the very conduct that the federal securities laws were designed to protect against regardless of the labels Sun and others used,” he said.
Meanwhile, SEC Chair Gary Gensler asserted, “This case demonstrates again the high-risk investors face when crypto asset securities are offered and sold without proper disclosure.”
Not the first time that celebrity crypto endorsers have landed on the receiving end of litigation: This case follows from the SEC’s October 2022 settlement with Kim Kardashian over her promotion of EMAX. Kardashian agreed to settle charges waged her (as well as Floyd Mayweather and former Boston Celtics star Paul Pierce) by the SEC for allegedly “touting on social media a crypto asset security offered and sold by EthereumMax without disclosing the payment she received for the promotion.” Specifically, the SEC found that the reality star-slash-brand-builder “failed to disclose that she was paid $250,000 to publish a post on her Instagram account about EMAX tokens, the crypto asset security being offered by EthereumMax.”
And not limited to government-initiated action, amid the implosion of FTX, Sam Bankman-Fried and a number of big-name FTX “ambassadors” were named in proposed class action lawsuits over their promotion of the now-bankrupt crypto exchange. Bankman-Fried, Tom Brady, Gisele Bundchen, Stephen Curry, Shaq, Udonis Haslem, David Ortiz, Trevor Lawrence, Shohei Ohtani, Naomi Osaka, Larry David, Kevin O’Leary, and the Golden State Warriors were named in since-consolidated class action complaints lodged with the U.S. District Court for the Southern District of Florida last year for allegedly engaging in deceptive and unfair trade practices and civil conspiracy.
The case is Securities and Exchange Commission v. Justin Sun, et al., 1:23-cv-02433 (SDNY).