Two of America’s biggest sports personalities, Tampa Bay Buccaneers quarterback Tom Brady and Golden State Warriors point guard Steph Curry, are among a number of celebrities a Texas regulator is investigating for potentially violating state securities laws.
Regulators are scrutinizing their ties to collapsed cryptocurrency company FTX.
Investigators looking at payments to celebrities
The Warriors signed a contract with FTX in December 2021, netting them $10 million for their international rights. Authorities are investigating the now-defunct crypto exchange firm for mishandling customers’ money.
A number of high-profile figures have come under scrutiny for their ties to FTX US. Specifically, investigators are looking at payments they received to endorse the exchange. They also want to know what disclosures were made and how accessible they were to retail investors.
The ball got rolling last month when the Texas State Securities Board decided to probe the operations of FTX. They were checking to see whether the firm’s yield-bearing crypto accounts were offering Texans unregistered securities.
Investigations took a turn when the multi-billion-dollar firm went bust on Nov. 11.
What happened to FTX?
FTX was one of the world’s largest cryptocurrency exchanges. It offered customers the ability to trade digital currencies for other digital currencies or traditional money, and also vice versa. Sam Bankman-Fried founded the company in April 2019. Its headquarters is in the Bahamas.
In its heyday, FTX spent substantial sums lobbying the US government to introduce crypto-friendly regulations. Problems arose when FTX began building business on risky trading options that may not be legal in the US.
Back in 2017, Bankman-Fried created two supposedly separate companies: a hedge fund called Alameda Research and a crypto exchange, FTX. Through the exchange, he generated and sold an exorbitant amount of cryptocurrencies called FTTs. Much of these FTTs funneled into his other – not really separate – company Alameda, giving the impression the funds were legit.
Things went pear-shaped when FTX’s customers became weary of the young billionaire’s trading strategies and wanted to withdraw their funds. A rude awakening awaited them when they realized that Bankman-Fried had secretly shifted $10 billion of their funds to Alameda Research.
The savings of hundreds of thousands of customers who deposited their holdings on the FTX platform fell into peril the day FTX filed for bankruptcy. So far, only $740 million worth of cryptocurrency belonging to parts of FTX’s business has surfaced– a fraction of what customers are owed.
Celebrity involvement in FTX
Sporting and media icons who had business relationships with FTX may now have cause for concern. The Texas State Securities Board aims to figure out to what extent celebrities should be held accountable when the companies they endorse go bust.
Joe Rotunda, the board’s enforcement director, told Bloomberg in an interview that he’s looking into payments made to celebrities for their public support of FTX.
“We are taking a close look at them.”
These investigations come a week after a class-action lawsuit filing in Florida. It’s against Curry, Brady, tennis player Naomi Osaka, Jacksonville Jaguars quarterback Trevor Lawrence, MLB star Shohei Ohtani, among others. It claims FTX used the endorsement of celebrities as part of a larger scheme to exploit “unsophisticated investors.”
The FTX brand ambassadors could be liable. SEC and state securities regulators cite an SEC statement urging caution around celebrity-backed ICOs.
“Persons making these endorsements may be liable for potential violations of the anti-fraud provisions of the federal securities laws for participating in an unregistered offer and sale of securities.”
Are FTX accounts securities?
This begs the big question as to whether FTX’s yield-bearing accounts are securities or not, and to what extent the defendants “personally participated or aided in making the sale.”
To determine if an investment contract is a security subject to US securities laws, a court needs to apply the Howey Test which stipulates four elements.
- An investment of money …
- In a common enterprise …
- With the expectations of profit …
- From the efforts of others.
As it stands, private plaintiffs may not sue celebrity brand ambassadors for violating the 1933 act’s anti-touting law. But the SEC absolutely can. A number of celebrities, including Kim Kardashian, Mark Cuban, DJ Khaled and also Floyd Mayweather Jr. have been successfully prosecuted under the anti-touting law. They paid millions of dollars in fines.
Rotunda said celebrities do not get a free pass in Texas.
“Anyone who renders investment advice in Texas typically needs to be registered and they typically have to truthfully disclose all known material facts. In Texas, there is not a different justice or regulation for people who are celebrities.”
Rotunda and his team are putting together a list of all relevant parties. The list comes from court filings by FTX’s current CEO, John J. Ray III. Points of interest include:
- what promoters disclosed
- how they were remunerated
- how their promotions were scripted and filmed
Neither Curry nor Brady have made statements regarding the allegations so far.