Famous cryptocurrency hucksters should take a close look – The Market Herald

Remember when actor Matt Damon pontificated about how “fortune favors the brave” investing with Crypto.com? Or when director Spike Lee applauded the digital rebellion promoted by Coin Cloud? Following the spectacular crash of cryptocurrency exchange FTX, Mr. Damon, Mr. Lee and most other cryptocurrency touting celebrities have remained largely silent, and for good reason.

There was little precedent for the scale and star power that characterized the flood of high-profile celebrity endorsements promoting cryptocurrencies. And now cryptocurrency values ​​and cryptocurrency companies are failing, leading investors’ savings to soar as well.

As the former head of the Securities and Exchange Commission’s Office of Internet Enforcement, I believe regulators have some of these famous endorsers in their sights and, when appropriate, will aggressively prosecute them. Buying a bottle of Gatorade or a Rolex watch offered by a celebrity probably never put your life savings at risk. But buying a cryptocurrency endorsement certainly did, and the actions of these proponents deserve at least close scrutiny.

Given the growing cryptocurrency-related investor carnage, the SEC and the Department of Justice may step up their efforts. The SEC has already been pretty aggressive in its cryptocurrency enforcement program, filing over 100 enforcement actions and winning every one I’ve reviewed. Both the SEC and the Justice Department have also created special crypto units, each eager to hit the ground running.

Also, the timing wasn’t good. Many celebrities touted the life-changing power of investing in cryptocurrencies just as the speculative craze was nearing its peak.

In its recent action against FTX founder Sam Bankman-Fried, the SEC said FTX had co-opted celebrities to promote its brand as a “reputable company,” citing Tom Brady, Gisele Bündchen, Stephen Curry, Major League Baseball and Miami Warm up the basketball team in investment materials shown to at least one investor. The language suggests that the SEC views FTX’s use of celebrities as a critical aspect of Mr. Bankman-Fried’s alleged plan and will most likely investigate the nature of FTX’s celebrity deals and joint efforts.

Some celebrities may seek First Amendment protection. But the First Amendment is not a defense against a fraud charge. We don’t know at this point what celebrities knew about the companies 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 to which they relied on experts as their legal counsel, and any other evidence of their complicity in any potential wrongdoing.

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

That is why famous cryptocurrency promoters are not legally equal. Simply appearing in a commercial or smiling for a billboard seems unlikely to warrant federal prosecution. While both Mr. Curry, the NBA superstar, and Larry David, the comedian, promoted FTX, both made it clear in their ads that they weren’t experts. (In an amusing twist, Mr. David doubted whether investing in FTX made sense.)

Most vulnerable to investigation are those celebrities who may have exposed themselves to the possibility of knowing, or were reckless in not knowing, that the cryptocurrency company they partnered with was allegedly deceiving investors. In several advertisements Mr Brady and his then wife Mrs Bündchen did not distance themselves in the same way as Mr Curry and Mr David; Ms. Bündchen was also a consultant on environmental and social initiatives 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 investment opportunities. Both Mr. O’Leary and Mr. Cuban are known for their business savvy, so investors probably take their endorsement more seriously than that of other celebrities.

Mr. O’Leary was paid approximately $15 million to act as a spokesperson for FTX. In a video posted on his website shortly before FTX went bankrupt, he said, “If ever there’s a place I could be that I won’t get into trouble, it’s going to be at FTX.”

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

Fans of Mr. Cuban may have suffered a similar fate due to the deal between the Dallas Mavericks, the NBA team he owns, and Voyager Digital, a cryptocurrency lending and brokerage firm. Unlike, say, a beer sponsorship, the Mavericks/Voyager collaboration has been described by its principals as more akin to a crypto-partnership.

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

Eight months later, Voyager filed for bankruptcy, and shortly thereafter, a group of Voyager customers filed a class action lawsuit in Florida federal court against Mr. Cuban, the CEO of Voyager and the Dallas Mavericks.

What really hurts is that the exploited victims of cryptocurrencies are too often those who cannot afford to lose what they have invested. This is partly because promoters have argued that cryptography is a game-changing equalizer for the unbanked. I believe encryption is actually the opposite and just another example of what scholars have called “predatory inclusion” – in other words, underprivileged and disaffected communities gain access under the auspices of inclusion, but that access can make their situation worse.

Last year, a study by the University of Chicago found that 44% of Americans who owned and traded cryptocurrencies were people of color. To make matters worse, a study by JP Morgan Chase released this month found that people on lower incomes most likely made their cryptocurrency purchases when prices were high relative to higher incomes and therefore suffered disproportionately.

And just as money lender storefronts are often concentrated in Black or Hispanic communities, the same appears to be happening with crypto ATMs (also known to charge fees that can range from 7% to 20% per transaction).

When crypto firms like FTX fail, their clients too often find themselves designated as unsecured creditors, last in line to be repaid, with little chance of recovery. And when regulators and prosecutors conduct archaeological digs to figure out who’s responsible, fame shouldn’t be providing anyone with a “get out of jail free” card.

This article originally appeared in The New York Times.

John Reed Stark is Senior Lecturer Fellow at Duke University Law School. From 1998 to 2009, he was the head of the SEC’s Office of Internet Enforcement.

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