Sam Bankman-Fried and a number of big-name FTX “ambassadors” have been named in a second proposed class action lawsuit over their promotion of the now-bankrupt crypto exchange. On the heels of being hit with the class action complaint that Edwin Garrison filed with the U.S. District Court for the Southern District of Florida on November 15, Bankman-Fried, Tom Brady, Gisele Bundchen, Stephen Curry, Shaquille O’Neal, Udonis Haslem, David Ortiz, William Trevor Lawrence, Shohei Ohtani, Naomi Osaka, Larry David, Kevin O’Leary, and the Golden State Warriors are being accused in another Florida-filed lawsuit of engaging in deceptive and unfair trade practices and civil conspiracy.
Given that Kavrui’s complaint was drafted by the same attorneys as those representing Garrison (namely, Adam Moskowitz and Boies Schiller’s David Boies), the allegations are largely identical to the ones set out by Garrison. In the newly filed complaint, Plaintiff Sunil Kavuri names the same defendants and details the same alleged wrongdoing in helping to promote the offer and sale of unregistered securities by way of FTX, while also failing to disclose “the nature, scope, and amount of compensation they personally received in exchange for the promotion of the deceptive FTX platform.”
The newer suit does contain a number of claims that depart from those alleged by Garrison, with Kavuri starting off, for instance, by arguing that “there can be no dispute that claims in this case must provide for strict liability, and therefore, if the FTX yield-bearing accounts (“YBAs”) are found to be ‘securities,’ all of the FTX ‘brand ambassadors’ can simply have no defense to the claims in this action.” Kavuri’s also asserts that attempts by the defendants to “push the ‘caveat emptor’ defense in the press, will have no application.”
Further setting the stage in his complaint, Kavuri argues that this is not a case “where [he] made a ‘risky’ investment in stock or cryptocurrency, or that he lost money speculating on various cryptocurrency projects.” Instead, his claims that his case arises “simply from the purchase of a YBA,” which was “guaranteed to generate returns on his significant holdings in the account, regardless of whether those assets were held as USD, legal tender or cryptocurrency, and regardless of whether any trades were made with the assets held in the YBA.” In other words, the YBA “was portrayed to be like a bank account, something that was ‘very safe’ and ‘protected,’” per Kavuri, who contends that this is “the narrative that the defendants pushed in promoting the offer and sale of the YBAs, which are unregistered securities.” For that, Kuvari asserts that the defendants are “liable for [his] losses, jointly and severally and to the same extent as if they were, themselves, the FTX entities.”
Just as in Garrison’s case, Kavuri accuses the defendants of violating the Florida Securities and Investor Protection Act, which makes it unlawful to sell or offer to sell unregistered securities, and the Florida Deceptive and Unfair Trade Practices Act, and is seeking an order from the court that the YBAs were securities required to be registered with the U.S. Securities and Exchange Commission and state regulatory authorities, that the “deceptive” FTX Platform “did not work as represented,” and that the defendants were paid “exorbitant sums of money to peddle FTX to the nation.”
Not Your Average Endorsers
Reflecting on the ability of class action plaintiffs to successfully pursue FTX’s brand endorsers over their appearances in commercials and social media campaigns in order to promote the crypto exchange, at least some lawyers have expressed skepticism. “The plaintiffs are more likely to extract damages from Bankman-Fried than they are from the celebrity endorsers, Darren Heitner, a Florida lawyer who specializes in athletes and technology, told the Washington Post in connection with Garrison’s suit. “I don’t think people signed up to FTX because Tom Brady said ‘I put all my money there’ — in fact he never said that. I would not be terribly surprised if the celebrities prevail on a motion to dismiss.”
Others are not quite convinced that the celebrity ambassadors have such an easy way out. “The problem these celebrities have is that they went a step further than just appearing in a commercial,” Sherman Silverstein’s Alan Milstein told Sportico, “In the ads, some of them announce that they are excited ‘to partner’ with FTX or to be ‘brand ambassadors’ [for] FTX or to become big-time investors themselves in the firm.” Both Garrison and Kavuri allege “some of the biggest names in sports and entertainment have either invested in FTX or been brand ambassadors for the company,” pointing to Kevin O’Leary, for example, is an FTX shareholder, and linking to an FTX press release that announced Stephen Curry as an FTX ambassador and shareholder in 2021.
The plaintiffs also allege that Tom Brady, Gisele, Shohei Ohtani, and Naomi Osaka took ownership stakes in the company, seemingly in furtherance of an argument that these are not your average endorsers, and thus, they should be treated accordingly for helping to promote FTX. The failed crypto exchange, which was until recently led by Bankman-Fried, used these stars’ “credibility to try and convince the public the investment was safe,” Milstein said distinguishing the endorsements at play here from the consumer goods-centric ads that brands traditionally enlisted sports stars and other celebrities for.
FTX’s strategy of pushing famous endorsers-as-part owners is part of a larger trend of companies, particularly startups, enlisting celebrities to promote projects, while also bringing them on-board in advisory and/or investor roles, which diverges from the longstanding practice of celebs simply appearing in ad campaigns and maybe doing some additional promotional work without taking on any additional roles.
Well-known celebrities are actively exercising more leverage when negotiating the terms of the deals they enter into, and as a result, they stand to profit even more handsomely with an equity stake (or in many cases, a profit-sharing agreement) than if they were to simply take the usual endorsement check. Moreover, endorsements that stem from these ownership endeavors tend to be viewed as more authentic in the eyes of consumers, which bodes well for the promoted company and its goods/services, particularly in a market that is saturated with often-undisclosed influencer advertising and diminishing consumer trust.
“Taking on a more active role in a business – or at least appearing to – essentially demonstrates that the celebrity has a stake in the success of that business, beyond the money they would receive for an endorsement,” ThingTesting stated last year. In many cases, this is a win-win for both sides; ThingTesting points to a 2015 deal in which “Beyonce asked Uber to provide equity, rather than cash, in exchange for a performance at a corporate event the company hosted. When the ride-sharing app went public in 2019, she was able to cash out.”
More Litigation to Come
The two lawsuits come as crypto scams are on the rise. In their respective complaints, Garrison and Kavuri cite the Federal Trade Commission’s finding that “cryptocurrency scams have increased more than ten-fold year-over-year with consumers losing more than $80 million since October 2020, due in large part to the use of such celebrity endorsements,” as well as advertising on social media. At the same time, the Securities and Exchange Commission is sending a similar message, with the agency’s Enforcement Division Co-Director Steven Peikin saying this summer that investors “should be skeptical of investment advice posted to social media platforms, and should not make decisions based on celebrity endorsements,” and noting that “social media influencers are often paid promoters, not investment professionals, and the securities they are touting, regardless of whether they are issued using traditional certificates or on the blockchain, could be frauds.”
The rising number of lawsuits centering on the advertising and endorsement of FTX are expected to continue to grow, with Elliott Lam, a Canadian citizen and Hong Kong resident, filing a proposed class-action lawsuit in San Francisco federal court on Sunday on behalf of himself and “thousands, if not millions” of people outside the United States who used FTX’s platform. In the case, the Golden State Warriors is named as a defendant alongside Bankman-Fried, who allegedly leveraged “the international reach” of the NBA team to “outcompete[e] competitor trading platforms and get consumers to use the FTX platform technology instead,” as FTX “need[ed] to attract new consumers to continue funneling them (and the money they put into the FTX system) as part of an elaborate scheme to prompt up the businesses.”
The case is Sunil Kavuri, et al., v. Sam Bankman-Fried, et al., 1:22-cv-23817 (S.D. Fla.)