Should Investors Blame Celebrities for Their Own Poor Decisions?

There is a long history of celebrities promoting various products and investments that did not turn out well for the individuals who acted on their advice. (Joe Mont, TheStreet). 50 Cent using Twitter to “pump” up the share price of a business he partially owned is one notable example. (Id.; Mike Masnick, TechDirt). FTX, a large crypto exchange which many celebrities publicly endorsed, collapsed in November 2022 in no small part due to fraud by its CEO, Sam Bankman-Fried. (Tietrich Knauth & Tom Hals, Reuters; Nathan Reiff, Investopedia).  This public endorsement by various celebrities appears to be another example of celebrities scamming their fans. (Joe Mont, TheStreet; Jennifer Korn, CNN; see Immanual John Milton, Bloomberg). Specifically, the FTX scandal highlights celebrities’ long history—and exceptionally poor track record—when it comes to endorsements in in the crypto asset space. (Immanual John Milton, Bloomberg; PYMNTS).

Tom Brady and wife, Gisele Bundchen, who appeared in advertisements in 2021, and Larry David, who appeared in advertisements in 2022, are defendants in a class action lawsuit related to their role in visibly endorsing FTX. (Todd Spangler, Variety; Ilyse Liffreing, AdAge). However, they are far from the only celebrities involved; Gwyneth Paltrow, David Ortiz, Shaquille O’Neal, and Stephen Curry are also defendants in the class action lawsuit filed against FTX. (Jennifer Korn, CNN; Zoe Guy, Vulture). The plaintiffs involved in this class action are (1) accusing FTX of using these celebrities to lure in unsophisticated investors, and (2) accusing the celebrities themselves of convincing these investors to invest in FTX. Id. Moreover, the class action lawsuit alleges the celebrities promoted unregistered securities and violated Florida laws protecting investors from fraud and deception. (Steven Zeitchik and Julian Mark, The Washington Post).

From his involvement in advertisements and significant ownership stake in FTX, it is abundantly clear that Tom Brady should be included in this class action. (Todd Spangler, Variety; Ilyse Liffreing, AdAge; Fortune). Because Tom Brady owned about 1.14 million shares, or approximately 0.15% of FTX as of 2021, he clearly had at least some understanding of the company. (Fortune; Pavitra Shome, Essentially Sports; Todd Spangler, Variety). However, some, like Shaquille O’Neal, are currently protesting being included in the class action lawsuit, using the defense that they only acted as a paid spokespeople and “[don’t] understand crypto.” (Ryan Morik, Fox News). Moreover, some, such as the former head of the SEC’s Office of Internet Enforcement, argue that the inclusion of these celebrities in the class action lawsuit is strategic as the celebrities  are more likely to settle rather than battle it out in court.  (Joe Schneider, Zijia Song, Financial Advisor).

This is far from the first time celebrities have been targeted for promoting crypto firms and investments. (Richard Whiddington, ArtNet). Justin Bieber, Post Malone, Madonna, Jimmy Fallon, and several others are currently defending a class action lawsuit for their promotion of a series of Non-Fungible Tokens (“NFTs”). (Id.; Shanti Escalante-de Mattei, ARTnet). The complaint in this lawsuit states that these endorsements were part of a scheme to inflate the value of these NFTs and further alleges that all the defendants are guilty of numerous violations of Section 10(b) of the Exchange Act as well as SEC rule 10b-5. (Shanti Escalante-de Mattei, ARTnet; Yahoo Finance; Complaint) In fact, these NFTs rapidly declined in value. (Ben Kesslen, New York Post). Furthermore, the celebrity promoters in this case did not disclose the compensation they received in return for promoting the NFTs. (Shanti Escalante-de Mattei, ARTnet) The complaint specifically alleges that the company behind the NFTs attempted to conceal its payment to Post Malone by compensating him in Ether through the blockchain. Id.  Lying to investors to inflate the value of the NFTs would certainly satisfy the requirements of Section 10(b) and rule 10b-5. (Complaint).

These lawsuits are remarkably similar and suggest a disturbing trend among celebrities. Indeed, the celebrities in both the aforementioned NFT lawsuit and the current FTX lawsuit are being sued for promoting or endorsing crypto assets that proceeded to rapidly decline in value. This trend is troubling because celebrities have long been known to influence human behavior and are often seen as role models (Ellen Selkie, MD, MPH, JAMA Network). This influence extends to everything from eating habits, drug use, and, it seems, to investment strategies. (Id.; Yusuke Okamoto, Cue). Because of this influence, it is impossible to ignore that celebrity endorsement of investments is a major issue. However, filing suit against celebrities for paid (or even unpaid) statements would create a slippery slope because it would essentially restrict the celebrities from speaking freely. Moreover, targeting celebrities for promoting questionable investments would go against the SEC’s disclosure-based enforcement regime. (Securities and Exchange Commission). The SEC does not impose any requirements for investments to perform above a certain benchmark and instead focuses on regulating the amount and truthfulness of the information surrounding the investments. (See id.).  Indeed, so long as the all the information surrounding these endorsed investments is disclosed, there wouldn’t be any violation. (See id.).

Under the SEC’s disclosure-based regime, it is not unlawful to promote poor investments so long as investors have all the information required for an investor to make an informed decision regarding whether to purchase the underlying security. Id. In fact, people promote poor investments (I’m looking at you, hedge funds) all the time with no legal consequences. (Mark. J. Perry, AEI). Subsequently, even though it may be morally dubious for celebrities to promote these questionable investments, they should not be held liable so long as the investor has all the information necessary to make an informed decision.  Nevertheless, given the celebrities in both the FTX case and the aforementioned NFT case will likely settle for substantial sums, disgruntled parties will likely continue to target celebrities in the hope of high payouts.