Celebrities who endorsed crypto, NFTs land in legal crosshairs after investor losses

Now they and other celebrities are facing civil lawsuits from investors who suffered losses on virtual assets, as well as scrutiny by regulators for allegedly duping the investing public. The legal actions, which have prompted some agents to caution their clients against financial endorsements, could clarify the ground rules for crypto promotions, as well as the hurdles investors must clear to hold promoters liable when investments go south.

“Promoting a company and promoting a security issued by a company are not necessarily the same thing," said Tibor Nagy Jr., an attorney who represents both plaintiffs and defendants in the cryptocurrency space. “We should expect judicial guidance and clarity on the rules of the road for celebrities in the next few months."

The use of celebrity promoters heated up in 2021 during the massive bull run in crypto. Last year, celebrity crypto ads filled prominent slots in the Super Bowl, the largest marketing event of the year.

Lawyer Sean Masson, of law firm Scott + Scott, who has filed several proposed class-action suits, said celebrities found they could be compensated simply for touting a token, without realizing their legal obligations under federal and state rules governing endorsements and compensation.

“All that fast, easy money swirling around attracts people," Mr. Masson said.

In December, one of his lawsuits targeted technology company Yuga Labs, which develops nonfungible tokens. The suit also names Madonna and a half-dozen other celebrities as defendants, accusing them of violating California state consumer protection statutes and federal securities laws by inducing investors to purchase Bored Ape Yacht Club NFTs—at artificially inflated prices—without disclosing they had been compensated for their promotions.

In March, Madonna posted on Twitter pictures of an ape NFT and herself, saying, “I finally entered the MetaVerse." Two months later, she received a Bored Ape Yacht Club NFT valued at nearly a half-million dollars as compensation, the lawsuit alleges. Later she promoted the NFTs in media interviews, saying she “was hellbent on getting an Ape," the lawsuit said.

A representative for Madonna said she paid for her ape NFT. A spokesman for Yuga Labs said in a statement that the lawsuit’s allegations were without merit. “We have never paid anyone, famous or not, to join the club," the representative said.

In Florida, a federal lawsuit alleges celebrity promotion of defunct crypto exchange FTX by Mr. Brady and others drove consumers to invest in unregistered securities sold on the company’s platform.

“This was something where, in part because of the promotions, everybody thought it was safe," said lawyer David Boies, who is representing the plaintiffs.

The defendant celebrities disclosed their FTX partnerships but the lawsuit alleges they violated Florida securities and consumer-protection laws by failing to provide specific information on their compensation in exchange for their promotion. They are also accused of failing to perform due diligence ahead of promoting FTX products.

A lawyer for Mr. Brady declined to comment.

Plaintiffs in the new batch of cases make a mix of claims, some under federal law and others brought under state laws that impose a range of legal requirements on the promotion of financial products. Some lawsuits also have cited state laws prohibiting unfair business practices.

The U.S. Securities and Exchange Commission has said that celebrities who promote virtual tokens it considers securities must disclose the nature, scope and amount of compensation they receive. But outside of case-by-case enforcement actions, the commission hasn’t specifically articulated its views on what digital assets fall under these obligations, leaving the legal landscape uncertain, lawyers say.

“The SEC hasn’t shared its view on most if not all of the most widely traded tokens," said lawyer Philip Moustakis, a partner at Seward & Kissel LLP. “If they had done that, there would be far more clarity for investors and far more clarity for the markets."

An SEC spokesman pointed to the agency’s publicly available framework for determining whether digital assets are securities.

Most suits, filed relatively recently, haven’t yet produced notable rulings. But a federal judge in California dismissed a proposed class-action lawsuit against Ms. Kardashian and other celebrities, saying the plaintiffs hadn’t sufficiently made allegations that celebrity promoters had conspired with others to pump up the value of digital tokens.

“The court acknowledges that this action raises legitimate concerns over celebrities’ ability to readily persuade millions of undiscerning followers to buy snake oil with unprecedented ease and reach," U.S. District Judge Michael Fitzgerald wrote. “But, while the law certainly places limits on those advertisers, it also expects investors to act reasonably before basing their bets on the zeitgeist of the moment."

Michael Rhodes, Ms. Kardashian’s lawyer, said he was pleased with the “well-reasoned ruling."

Some defendants had argued that the suit didn’t show that investors had relied on celebrity promotion. “Crucially, no named Plaintiff alleges that they in fact viewed either Instagram post before purchasing Tokens during the relevant time period," lawyers for Ms. Kardashian wrote in a court brief.

With the judge’s permission, the plaintiffs filed an amended complaint refining their allegations.

Even before the crypto bust, there were potential dangers for celebrity endorsements of financial products, and some financial firms themselves weren’t enthusiastic about entering into such deals.

“When you start talking about money there’s a lot of guardrails put up," said Tony Mulrain, co-chair of the sports law practice at law firm Holland & Knight. “Convincing your fans to buy a certain brand of bleach is not regulated as harshly as if this person put their entire life savings into a security because someone that they value and respect said so."

Leigh Steinberg, a sports agent who has represented athletes including Kansas City Chiefs quarterback Patrick Mahomes, said there are many other product categories that present marketing opportunities without the same risks. “Someone can do a great portfolio of powerful marketing agreements without ever touching areas that are more fraught with peril," he said.