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HomeMarketTom Brady Is Subject of FTX Probe. Proving Culpability May Be Hard.

Tom Brady Is Subject of FTX Probe. Proving Culpability May Be Hard.

Tampa Bay Buccaneers quarterback Tom Brady.(Photo by Mike Ehrmann/Getty Images)

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State securities regulators are homing in on whether sports stars and other celebrities may have violated any laws when they endorsed and promoted crypto exchange FTX before its bankruptcy. But proving any liability could be difficult, attorneys say.

Tampa Bay Buccaneers quarterback Tom Brady and Golden State Warriors point guard Steph Curry were among a handful of celebrities who appeared in commercials and advertisements about FTX or tweeted positively about the company. In one ad, Brady calls a bunch of friends to see if they’re “in” on FTX. The premise of a Super Bowl ad from this year was Brady accidentally spreading a rumor that he wanted to be traded, only to reveal that he meant trading cryptocurrencies.

The advertisements have caught the eyes of state securities regulators who are now looking at whether the celebrities were in effect helping to sell securities and, if so, whether they sufficiently disclosed how they were compensated to do so, says Joe Borg, director of the Alabama Securities Commission. Borg said the inquiry involves more than a dozen states led by Texas. Bloomberg News reported the Texas inquiry earlier this week.

Representatives for Brady and Curry didn’t respond to a request for comment.

The probe potentially adds to the legal woes for the celebrities, who were also sued earlier this month in a proposed class action. Bahamas-based crypto exchange FTX declared bankruptcy earlier this month and is now under investigation by several federal agencies for potentially misusing customer funds.

While Brady and the other endorsers make a tempting target for attorneys looking to claw back funds for customers who lost money, it could be difficult to prove any liability or that they broke the law, attorneys say.

“Celebrities who are paid simply to read scripts and that endorse products are not generally going to be liable for any unfortunate outcome to somebody who actually then uses the product,” says Howard Ehrenberg, an attorney with Greenspoon Marder in Los Angeles. “It’s going to be difficult to create a causal link between the celebrity and the loss.”

Presuming the celebrities didn’t say something they knew was untrue, they will likely prevail in class actions brought against them, says Andrew Stoltmann, a Chicago-based securities attorney.

Securities regulators could pursue the endorsers to the extent they were found to have been promoting securities, Stoltmann said, though its unclear that they would have the purview to bring a case if they only promoted FTX generally, rather than a specific product.

That said, “I don’t think there’s any question that Tom Brady and these other celebrities need very good civil counsel,” Stoltmann said. “At a time when a  crypto platform implodes in a $10-billion-plus flameout, they’re also going to be looking at the deep pockets, and there aren’t too many deep pockets left.”

It wouldn’t be the first time regulators have hit celebrities for cashing in on crypto endorsements. In 2018, the Securities and Exchange Commission settled charges with former boxing champion Floyd Mayweather Jr. and music producer DJ Khaled for failing to disclose payments they had received to promote initial coin offerings. The pair agreed to pay disgorgement, penalties, and interest without admitting or denying the findings.

TV star and businesswoman Kim Kardashian earlier this year settled charges with the SEC that she had promoted a crypto token without disclosing the payment she had received. She paid $1.26 million without admitting or denying the findings. Kardashian settled to put the matter behind her and avoid a “protracted dispute,” her attorney said in a statement at the time of the settlement.

In both those cases, the celebrities were promoting specific crypto tokens, rather than a trading platform.

Before FTX’s bankruptcy, Texas’ securities regulator disclosed that it was probing FTX US and founder Sam Bankman-Fried over whether the firm was selling unregistered securities. FTX said at the time that it was in talks with the regulator.

Write to Joe Light at joe.light@barrons.com

Credit: marketwatch.com

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