FTX ‘Ponzi Scheme’ Lawsuit Could Set New Mark for Endorser Liability

The abrupt implosion of crypto exchange FTX amid accusations of fraud brought against FTX founder Sam Bankman-Fried are—in the words of prominent sports litigator Alan Milstein—“sure to rock the sports world like nothing that has happened before.”

On Wednesday, Oklahoma resident Edwin Garrison sued Bankman-Fried along with a dozen celebrities, including Tom Brady, David Ortiz, Naomi Osaka, Shohei Ohtani and Steph Curry. Garrison says after he was exposed to “misrepresentations and omissions,” he purchased unregistered security from FTX in the form of a yield-bearing account (YBA). Garrison then funded his account “with a sufficient amount of crypto assets to earn interest.” Like other FTX customers, he stands to lose his investment. Garrison wants his lawsuit to become a class action.

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One of Garrison’s attorneys is David Boies, who has represented the NFL, the NBPA, the Yankees and NASCAR in legal controversies. More famously, Boies argued for Vice President Al Gore in Bush v. Gore and led the Justice Department’s antitrust case against Microsoft. An attorney of Boies’ stature would likely not agree to join Garrison’s suit without being confident the case would advance past a motion to dismiss and into pretrial discovery.

The 41-page complaint retells the rise and fall of FTX, with a focus on consumer losses totaling as much as $50 billion. Much of the blame is placed on Bankman-Fried and the “precarious house of cards” he built.

Bankman-Fried, the complaint asserts, divided his cryptocurrency “empire” between FTX and Alameda Research, with Alameda’s balance sheet resting “on a foundation largely made up of a coin that a sister company invented, not an independent asset like a fiat currency or another crypto.”

The complaint also draws attention to Bankman-Fried “secretly” transferring “at least $4 billion in customer funds from FTX to Alameda without telling anyone.” This transfer allegedly occurred “after Alameda was hit with a series of losses” and “the FTX entities lent more than half of its $16 billion in customer funds to Alameda in total, with more than $10 billion in loans outstanding.”

The complaint then pivots to assigning blame onto celebrities for varying roles in supporting and promoting FTX and the company’s strategy to offer and sell promises to Americans. Garrison portrays the celebrities as more than mere endorsers. They are depicted as co-owners of FTX and conspirators in a plot to defraud the fans who admire and trust them.

Brady, for example, is depicted as taking an equity stake in FTX along with Gisele Bündchen, his former wife and fellow co-defendant. The duo also participated in an advertising campaign for FTX. Osaka, meanwhile, “gained an equity stake in FTX and payments in unspecified amounts of cryptocurrency,” in exchange for becoming a brand ambassador for FTX and encouraging women to “start investing in crypto.”

Judge K. Michael Moore will decide whether to certify Garrison’s case as a class action on behalf of two classes. The first is a nationwide class representing consumers who purchased or enrolled in YBAs, and the second is a Florida subclass representing Floridians who did the same.

The complaint accuses Bankman-Fried, Brady and the other defendants of violating the Florida Securities and Investor Protection Act. FTX, aided by the celebrities’ “material assistance,” are accused of offering and selling unregistered securities. This arrangement, Garrison argues, constituted a Ponzi scheme.

“FTX Entities shuffled customer funds between their opaque affiliated entities, using new investor funds obtained through investments in the YBAs and loans to pay interest to the old ones and to attempt to maintain the appearance of liquidity,” the complaint charges. The celebrities, along with Bankman-Fried, allegedly utilized “immoral, unethical [and] unscrupulous” tactics to dupe consumers into handing over money.

There’s long been a gap between whether endorsers can be held liable and real-world examples of courts finding liability. The Federal Trade Commission’s endorsement guides establish that endorsements draw from honest opinions and not reflect misleading messages. As detailed by Sportico, the agency is modernizing the guides to better reflect influencers on social media.

In 2004, the FTC lost a lawsuit against retired MLB All-Star Steve Garvey, who was paid to endorse Enforma, a weight loss supplement that promised to help “your body to burn more calories while you’re just standing or sitting around doing nothing—even while you’re sleeping.”

The FTC maintained Garvey was responsible for Enforma’s dubious claims, but Ninth Circuit judges weren’t convinced. They found Garvey could not be held liable unless he had “actual knowledge of any material misrepresentations” and was “recklessly indifferent to the truth or falsity of any representations he made.”

However, in 1997, a New York federal judge denied a motion to dismiss by retired MLB player Steve Yeager. He was sued as a celebrity endorser of a sports collectibles company. The company claimed that in exchange for a $3,000 deposit, it would provide leads on buyers of collectibles, among other benefits. The leads turned out to be worthless and the company refused to return deposits.

Milstein, who has litigated on behalf of Allen Iverson, Maurice Clarett and other prominent athletes, told Sportico the celebrities tied to FTX have reason to worry.

“The problem these celebrities have,” Milstein explained, “is that they went a step further than just appearing in a commercial. In the ads, some of them announce, they’re excited ‘to partner’ with FTX or to be ‘brand ambassadors’ with FTX or to become big-time investors themselves in the firm.” He noted that FTX used their credibility to try and convince the public the investment was safe when, it turns out, it was anything but.

Milstein distinguished FTX ads from prominent ones in previous eras, where the endorser’s role was more limited to delivering a pitch.

“Companies have long since used sports stars as pitchmen in their ads,” Milstein said. “By design, such ads use the sports fan’s adoration and idolatry of the stars as a means of selling their product. The Gatorade Michael Jordan ad campaign said it all: ‘Be like Mike.’ Fans knew they couldn’t aspire to play like Jordan, but at least they could dress like him, consume the products he consumes, buy what he was clearly paid to ask you to buy.

The defendants will have their chance to rebut the lawsuit’s claims. That will begin with them answering the complaint in the coming weeks. Given potential investigations by Congress, states’ attorneys general and law enforcement, the celebrities involved should be prepared for a potentially long legal fallout where they might serve as key witnesses—or even targets.

The sports fallout of FTX began before Garrison filed his lawsuit. Miami-Dade County thought it would be paid $135 million by FTX to rename the city’s NBA arena as FTX Arena. Most of that amount likely won’t be paid with FTX now in bankruptcy.

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