A new ruling in a case brought by investors in a now-worthless crypto token is a warning to celebrities and social media influencers like reality star Kim Kardashian: If you’re paid to hype a dicey investment to your followers, you may be liable when they take your advice.
U.S. District Judge Michael Fitzgerald of Los Angeles refused to toss California unfair competition claims against Kardashian, boxing champion Floyd Mayweather and NBA hall-of-famer Paul Pierce for their allegedly deceptive promotion of EthereumMax tokens in the midst of the 2021 crypto boom.
The judge, who had previously granted the celebrities’ motions to dismiss the prospective class action, found that the 162-page amended complaint adequately alleged that Kardashian, Mayweather and Pierce “were profiting off endorsements at their fans’ expense by touting an investment opportunity that had no legitimate business plan.”
The celebrities aimed their promotional efforts at “already-dedicated followers” who were “particularly vulnerable” to their messages, Fitzgerald said, rejecting defense arguments that plaintiffs could not reasonably have relied on celebrity social media posts to make investment decisions.
Hyping a crypto token without disclosing you’ve been paid to do so or without having any legitimate basis to believe in the tokens’ value “is an unscrupulous and thereby unfair practice,” the judge said.
Precedent in the 9th U.S. Circuit, Fitzgerald said, calls for courts evaluating consumers’ unfair competition claims to balance the alleged harm to consumers against the utility of the defendants’ conduct. Plaintiffs’ lawyers from Scott+Scott, he said, plausibly alleged that the “EMax charade” exemplified “cryptocurrency scams advertised through social media.”
The celebrity defendants, according to the judge, provided no arguments to tip the balance in their favor.
“Defendants do not offer a single benefit of allowing celebrities to endorse unvetted products without disclosing that they are being paid to do so,” Fitzgerald said.
Kardashian counsel Michael Rhodes of Cooley referred my email query to a Kardashian spokeswoman. She did not respond. Kardashian, who paid $1.26 million last October to resolve U.S. Securities and Exchange Commission allegations that she promoted EMax without disclosing its $250,000 payment to her, argued in her motion to dismiss investors’ claims that neither of her two Instagram posts about the tokens was false or misleading and that plaintiffs could not show they lost money as a result of her posts.
Pierce defense lawyer Joel Weiner of Katten Muchin Rosenman declined to comment through a firm spokeswoman. Pierce’s dismissal motion argued that his tweets promoting EMax – including a tweet about his $2 million profit from his own stake in the tokens – were inconsequential “puffery” that no investor could reasonably relied upon as financial advice. Pierce, who allegedly received nearly $250,000 in EMax tokens as payment for touting the investment, paid $1.4 million in February to settle the SEC’s allegations of deceptive securities promotion.
Mayweather is represented by James Sanders of Reed Smith, who did not respond to my email query. The boxer, who is accused of promoting the tokens by wearing clothing with EMax labels in appearances leading up to his 2021 bout with social media influencer Logan Paul, argued in his dismissal motion that Mayweather never made any statements explicitly endorsing EMax, let alone false statements. The judge nevertheless said consumers might have concluded that Mayweather had a real stake in EMax because he allowed his fight against Paul to be a launch pad for the tokens.
Fitzgerald cautioned that plaintiffs’ lawyers from Scott+Scott will eventually have to explain exactly how each defendant’s allegedly deceptive promotion affected EMax values. That may prove to be “quite difficult,” he said. But at this preliminary stage of the case, the judge concluded, Scott+Scott can move ahead based on its theory that the market for the tokens was distorted by celebrity endorsements.
I should note that the judge also refused to dismiss investors’ Florida state securities law claims against EMax insiders and said Scott+Scott can try one more time to replead some of its clients’ California securities claims. (The incredibly dense 85-page decision analyzes numerous other theories and allegations, but I’ve hit the highlights.)
Broadly speaking, the lawsuit alleges that EMax tokens were a “pump-and-dump” scheme in which insiders used celebrity endorsements to drive up prices before leading a stampede to sell the tokens. EMax prices, according to the complaint, never recovered from the sell-off. The company denies any violation of state consumer and securities laws.
EMax counsel from King & Spalding did not respond to my request for comment.
Scott+Scott did not assert securities claims against Kardashian, Pierce and Mayweather. That’s in contrast to the strategy pursued by some of the plaintiffs’ lawyers suing FTX celebrity endorsers.
Sean Masson of Scott+Scott — which filed its initial complaint in January 2022, 10 months before the SEC announced its settlement with Kardashian — said the celebrities’ promotion of EMax sparked the firm’s interest in the tokens.
“This was a small project with extremely big celebrities endorsing it,” he said. “Once you start tugging, you see why: They were paid.” Misleading celebrity endorsements, Masson said, were the very essence of the EMax business model.
The new ruling, Masson said, should serve as a blueprint for crypto investors who contend they were duped by celebrity promoters. After Fitzgerald tossed plaintiffs’ previous complaint for (among other things) failing to establish that investors relied on the celebrities’ allegedly deceptive statements, he said, Scott+Scott went back to the name plaintiffs to document how endorsements affected their investment decisions.
The beefed-up amended complaint convinced the judge that investors had plausibly accused the celebrity influencers of doing just that: exerting influence over their followers by endorsing EMax tokens.
Fitzgerald’s previous decision dismissing claims against Kardashian and the other EMax promoters, Masson said, might have created an impression that celebrities can’t be held responsible for allegedly deceptive crypto touting. Tuesday’s ruling, he said, corrects that misimpression.
The decision “leaves no room for doubt,” Masson said. “You cannot get away with this.”
