Cryptocurrency Crash: Sports Icons Hit by Lengthy Legal Battles

Multiple civil lawsuits are ongoing regarding the FTX founder's criminal sentence, with nearly a dozen athletes and other sports figures named in class-action litigation stemming from their endorsement of FTX, Voyager Digital, and Binance. The lawsuits allege that these individuals promoted unregistered securities and failed to disclose compensation. If plaintiffs prevail, defendants could be liable for millions or billions in damages. The legal strategy hinges on determining whether cryptocurrencies are securities, which is still an unresolved issue in law.

Cryptocurrency Collapse Ensnares Sports Figures in Lengthy Legal Battles

The criminal proceedings against Sam Bankman-Fried, founder of the collapsed cryptocurrency exchange FTX, may have concluded with his recent 25-year prison sentence, but the fallout from the crypto market implosion lingers in the form of ongoing civil lawsuits involving prominent sports figures.

Nearly a dozen athletes, teams, and leagues are entangled in class-action lawsuits tied to their endorsements of FTX, Voyager Digital, and Binance, companies that crumbled amidst the 2022 crypto market crash. The lawsuits, which have been making their way through the courts for over a year, allege that the defendants are liable for investor losses due to promoting unregistered securities. Additionally, plaintiffs claim that the defendants failed to adequately disclose the compensation they received for their endorsements.

A handful of athletes and celebrities have already settled with plaintiffs, including Jacksonville Jaguars quarterback Trevor Lawrence and former NFL tight end Rob Gronkowski. However, high-profile defendants such as retired quarterback Tom Brady, former Dallas Mavericks majority owner Mark Cuban, and soccer star Cristiano Ronaldo remain in the legal crosshairs. If the plaintiffs prevail, the defendants could face billions of dollars in damages.

Brady, who appeared in TV ads with his then-wife Gisele Bundchen, has maintained that his promotional efforts for FTX did not involve the sale or solicitation of securities and that he was unaware of FTX's fraudulent activities. His lawyers contend that "no reasonable consumer would confuse these promotions for anything other than paid endorsements."

Cuban has argued that the assets he promoted for the now-bankrupt Voyager Digital were not securities and therefore not subject to regulations related to promotional activity. He has also questioned the jurisdiction of the court handling his case.

Ronaldo, who is named in a complaint seeking "a sum exceeding" $1 billion in damages related to his promotion of the Binance platform, has yet to respond to allegations that he "lent his celebrity and credibility" without disclosing compensation. Legal experts close to the situation reported that Cuban declined to comment, while none of the other defendants responded to requests for comment.

The legal strategy employed in these cases hinges on the crucial question of whether cryptocurrencies qualify as securities. If so, their promotion and sale would fall under a comprehensive set of regulations designed to protect the public.

"You're now selling a financial instrument," explained Charles Whitehead, a securities regulation expert and professor of business law at Cornell Law School. "And there are rules. This is a heavily regulated industry. There are rules that regulate people, spokespeople, who, for compensation, are running around and touting a security."

Courts determine whether an asset qualifies as an "investment contract" and therefore governed by U.S. securities law through the Howey Test, established by the Supreme Court in 1946. If an investment of money in a common enterprise, with an expectation of profits based on the efforts of others, is present, the asset is considered a security.

Federal securities law mandates that those promoting a security must fully disclose the nature, scope, and amount of compensation received for advertising, or risk violating anti-touting regulations.

The U.S. Securities and Exchange Commission (SEC), the primary enforcer of securities law, has asserted that most cryptocurrencies and other digital assets fall under the definition of securities. However, the issue remains unsettled in law.

During the crypto boom that began in late 2020, athletes became prominent ambassadors for cryptocurrencies and their exchange platforms. Brady, NBA star Steph Curry, and entertainment personalities like Larry David were among those endorsing crypto products through advertisements and social media posts.

However, the 2022 crypto market crash triggered a run on crypto exchanges, exposing the vulnerability of these platforms. Voyager filed for bankruptcy in July 2022, followed by FTX in November of the same year. The collapse of FTX, once valued at $32 billion, sent shockwaves through the financial world and prompted scrutiny from regulators and law enforcement.

In 2023, the SEC filed a lawsuit against Binance, the world's largest crypto exchange, alleging that the company operated an illegal trading platform and mishandled customer funds. Binance founder Changpeng Zhao ultimately pleaded guilty to "failing to maintain an effective anti-money laundering program," and the company was ordered to pay $4.3 billion in criminal penalties.

Sam Bankman-Fried's guilty plea to seven counts of fraud and conspiracy tied to the collapse of FTX resulted in a 25-year prison sentence. The fallout has also led to several class-action lawsuits against athletes and celebrities who had promoted Voyager, FTX, and Binance.

All of the ongoing cases have been filed in the U.S. District Court for the Southern District of Florida. The plaintiffs, represented by attorneys Adam Moskowitz and David Boies, allege billions of dollars in damages stemming from the companies' collapses. Moskowitz has stated that, based on bankruptcy court calculations, total investor losses amount to approximately $3 billion in Voyager Digital and $10 billion in FTX.

The outcome of these lawsuits remains uncertain, with the potential for jury trials or out-of-court settlements. The amount of liability that each defendant could face is unclear.

The Voyager Case

The Voyager Digital lawsuit names Mark Cuban and the Dallas Mavericks as defendants. Gronkowski, former NBA player Victor Oladipo, and NASCAR driver Landon Cassill were initially named as defendants but have since settled.

Cuban is accused of inducing plaintiffs to open interest-bearing accounts with Voyager Digital by falsely claiming to have personally invested in the company during a Mavericks news conference in October 2021. The Mavericks later tweeted that customers who downloaded the app, created an account, deposited $100, and made one trade would receive $100 in free bitcoin.

In response, Cuban's attorneys have argued that he advised individuals to "always be careful" with their money and to avoid "rush[ing] into" substantial deposits with Voyager. Cuban also maintains that the Voyager assets in question are not securities.

Moskowitz has asserted that Cuban faces "much more liability" than other celebrities involved in the class actions due to his "level of involvement."

"He's not just doing an advertisement," Moskowitz said. "I mean, he's the global partner of [Voyager Digital]."

Cuban has claimed that he had no agreement with Voyager and acted solely in his capacity as governor of the Mavericks. The NBA has also been named as a defendant in a separate case involving Voyager, with the lawsuit alleging that the league's "widespread promotion of Voyager's unregistered securities" makes it liable for damages. The NBA has not filed a response in court, and the case has been stayed pending a decision on the motion to dismiss the case against Cuban. Both cases are overseen by the same judge.

Lawyers for Cuban, the Mavericks, and the NBA have not responded to requests for comment.

The FTX Case

The FTX class-action lawsuit names defendants including Brady, Curry, Los Angeles Dodgers slugger Shohei Ohtani, basketball Hall of Famer Shaquille O'Neal, and Japanese tennis star Naomi Osaka. The celebrity athletes and teams have been accused of "contributing both to the perpetration of the fraud [by FTX], and to the sale of unregistered securities, in a vital way" without disclosing the amount and form of payment received.

A judge is currently considering preliminary objections from the defendants on jurisdictional issues and other basic motions. Brady, in his individual motion to dismiss the case, argues that his general promotion of FTX did not mention the "allegedly unregistered securities" and that the company's collapse "harmed" him as well. He also maintains that "no reasonable consumer would confuse these promotions for anything other than paid endorsements."

The defendants have argued in court filings that the lawsuits do not allege that the plaintiffs made purchases "as a result of viewing an advertisement involving" the athletes. Osaka and Curry have argued that they are not subject to the court's jurisdiction, while O'Neal has stated that he never mentioned the alleged securities in any of his promotions.

Attorneys for Ohtani have also argued that he is not within the court's jurisdiction and that his agreement with FTX was to promote the company in the Japanese market. They contend that Ohtani did not utter a single word in two internet ads for FTX and therefore could not have misled the plaintiffs.

The parties are awaiting a ruling from the judge on the jurisdictional questions and the defendants' motion to dismiss.

The Binance Case

The complaint against Cristiano Ronaldo involving Binance, filed late last year, alleges that the Portuguese soccer star repeatedly "lent his celebrity and credibility" to the crypto platform through promotions and NFT collections on a site that required customers to sign up and deposit funds. The lawsuit also alleges that he failed to disclose compensation for his promotion of Binance "securities."

Another Binance lawsuit filed last year named NBA player Jimmy Butler as a defendant. Butler has filed a motion to compel arbitration or dismiss the case, with his lawyers arguing that Butler "could not have caused any alleged injury because the statements attributed to him are neither untrue nor misleading, bespeak caution, constitute immaterial puffery, do not promote or even mention any alleged security identified in the Amended Complaint and certainly do not encourage investment in them."

Ronaldo has not responded to the claims in court filings, and spokespeople for Butler and Ronaldo have not returned requests for comment. The cases are currently awaiting a decision by a judge on whether an "arbitration agreement" in the Binance terms of use is binding. The clause generally stipulates that parties must bring claims before an arbitrator rather than a judge or jury.

The Precedents

Courts in different federal court circuits have issued conflicting rulings on whether cryptocurrencies are securities. Experts in the industry are unsure whether the legal argument proposed by Moskowitz and Boies will succeed due to the unique nature of each case.