A federal judge dismissed on Wednesday a lawsuit against celebrity endorsers of the cryptocurrency EthereumMax accusing them of fraudulently misleading their followers into buying EMAX tokens only to sell their stakes once its value was inflated.
The proposed class action alleged the celebrity promoters, including Kim Kardashian, Floyd Mayweather and Paul Pierce, conspired with the founders of the cryptocurrency to dupe investors into purchasing EMAX tokens using their endorsements in a pump-and-dump scheme.
While the case raises “legitimate concerns” over the ability of celebrities to persuade undiscerning followers to buy “snake oil with unprecedented ease and reach,” U.S. District Judge Michael Fitzgerald found that there’s an expectation for “investors to act reasonably before basing their bets on the zeitgeist of the moment.”
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The ruling spells trouble for other suits against endorsers of crypto platforms. In November, FTX investors sued a host of celebrities, including Larry David, Tom Brady and Stephen Curry, in a proposed class action for promoting what they called a “Ponzi scheme” that fraudulently shuffled customer funds between its affiliated entities.
The suit brought by EMAX investors detailed a racketeering conspiracy in which the creators of the token conspired with celebrity endorsers to implement a pump-and-dump scheme.
But Fitzgerald reasoned that the Private Securities Litigation Reform Act, which was passed in 1995 to discourage frivolous securities suits, likely bars a RICO claim in the case. He said that the law was intended to prevent racketeering claims from being brought in suits based on conduct that constitutes securities fraud.
The judge also found that there was no conspiracy to dupe investors into buying EMAX tokens.
“A hodgepodge of conclusory and disparate allegations does not a RICO claim make,” he wrote. “The allegations more plausibly suggest that each Defendant (especially the Promoter Defendants) acted in furtherance of their own personal advantage, regardless of the interests of the alleged enterprise.”
The investors claimed that the defendants shared a common goal to inflate the price and trading volume of EMAX tokens in order to sell their stakes for substantial profit.
Fitzgerald rejected the argument because some of the celebrity promoters had no stake in the price of EMAX. Mayweather, for example, was paid in Ethereum. It remains unclear what compensation Kardashian was given.
In June, Kardashian posted to her 250 million followers on Instagram an ad for EthereumMax, which has no connection to established cryptocurrency Ethereum. “Are you guys into crypto???? This is not financial advice but sharing what my friends just told me about the Ethereum Max token! A few minutes ago Ethereum Max burned 400 trillion tokens—literally 50% of their admin wallet, giving back to the entire e-max community. Swipe up to join the e-max community,” the post states.
And even if some promoters were paid in EMAX token, like Pierce, Fitzgerald concluded that the investors failed to explain how they acted to advance the alleged conspiracy. The celebrities endorsed EMAX for their “individual benefit,” he said.
“There is certainly a plausible non-deceitful purpose for a new venture to use celebrity endorsements to generate public interest,” the judge added. “Indeed, if the Court were to find an enterprise was sufficiently pled in this action, it is quite unsure where any sensible line could be drawn to distinguish lawful paid advertising from potentially criminal racketeering.”
Responding to claims that the defendants violated state consumer protection and competition laws, Fitzgerald found that the investors failed to point to specific endorsements that convinced them into buying EMAX tokens. Allegations that they broadly viewed multiple celebrity promotions aren’t enough, he concluded.
The investors will have another shot at fixing their allegations, although the judge was skeptical they can do so.
According to the Federal Trade Commission, consumers have lost more than $80 million since October in crypto scams, due in large part to celebrity endorsements. Kardashian has settled for $1.26 million charges brought by the Securities and Exchange Commission for promoting EMAX without disclosing that she also received payment for the endorsement. She’s barred from promoting crypto for three years.
