5 keys to learn from the FTX collapse 9:51
New York (CNN) --
With the implosion of Sam Bankman-Fried's FTX dominating headlines, celebrities promoting cryptocurrency are now under new legal scrutiny.
Tom Brady, Madonna, Gwyneth Paltrow and baseball Hall of Famer David Ortiz are just a few of the big names facing investor lawsuits as the crypto world unravels following FTX's fall from grace.
The backlash began earlier this month, when a class action lawsuit was filed against celebrities including Jimmy Fallon, Justin Bieber and Serena Williams for promoting "Bored Ape Yacht Club" NFTs.
NFTs are a widespread cryptocurrency-related phenomenon that essentially transforms digital works of art and other collectibles into unique, verifiable assets that are easy to trade on the blockchain.
The "Bored Ape Yacht Club" is a collection of 10,000 pieces of NFT digital art that live on the ethereum blockchain.
Bail denied to Sam Bankman-Fried, founder of FTX: he is charged with 8 criminal counts, including wire fraud and conspiracy
None of the celebrities named in the lawsuits immediately responded to CNN's requests for comment.
Tom Brady, Gisele Bundchen and others were sued in November by an FTX investor for their endorsement of the now-discredited cryptocurrency platform, and then Brady and Ortiz were named again in early December in a similar lawsuit for their endorsement of FTX.
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The lawsuits allege that these public figures failed to properly disclose their own involvement in digital financial institutions.
Investors in FTX are not expected to be able to get their money back, the company's CEO declared on Capitol Hill on Tuesday.
And people who invested money in “Bored Ape” NFTs are realizing that their investments are not worth what they paid for them, as the NFT market has imploded.
Regulators have been warning investors about the promotion of risky bets by celebrities for years.
"Celebrity endorsements of cryptocurrency are fraught with problems," the December lawsuit regarding Bored Apes reads, citing a 2017 SEC statement warning against such endorsements: "Celebrities and others are using the social networks to encourage the public to buy stocks and other investments. These sponsorships may be illegal if they do not disclose the nature, source and amount of any compensation paid, directly or indirectly, by the company in exchange for the sponsorship."
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Kim Kardashian and Floyd Mayweather, Jr. were among the celebrities who faced another cryptocurrency lawsuit in January that claimed executives at EthereumMax cryptocurrency conspired with celebrity promoters to entice investors to buy the EMax token, boosting their price and allowing them to sell their own tokens at a profit.
The lawsuit was thrown out in December by a federal judge in California who said it was not clear that the investors who sued actually viewed the promotions.
Promoting cryptocurrency has different implications than, say, promoting a sports drink or sportswear, Charles Whitehead, a professor at Cornell Law School, told CNN after FTX's November lawsuit.
"Selling an asset that is a financial instrument ... is not the same as selling running shoes," Whitehead said.
"All these celebrities who are going around doing these kinds of endorsements should stop and ask a securities attorney."
In its heyday, FTX was endorsed by various athletes and celebrities.
Brady and Bundchen, in particular, took an undisclosed stake in the stock in 2021.
This is the cryptocurrency crisis after the bankruptcy of FTX
Now, he is facing bankruptcy and his former CEO is in jail, accused of carrying out what one prosecutor called "one of the biggest financial frauds" in US history.
Cryptocurrency betting and celebrity-backed NFTs may be attractive to some investors, as celebrities make the case for people to join their digital fan club or invest in their brands.
This gives fans a feeling of privileged access.
But, as with all investments, buyers should be careful.
And after the cryptocurrency market crash and a series of lawsuits, celebrities may think twice about what they endorse in the future.
cryptocurrencyFTX
