SEC Charges Celebrities Over Cryptocurrency Endorsements

Lindsay Lohan, Jake Paul and other celebrities charged by the US financial watchdog over cryptocurrency endorsements

The US Securities and Exchange Commission (SEC) has filed charges against a number of minor name celebrities for violating US laws by touting cryptocurrencies.

The SEC announced charges against Lindsay Lohan (actor); Jake Paul (social media personality, boxer); DeAndre Cortez Way aka Soulja Boy (American rapper); Austin Mahone (American singer); Michele Mason aka Kendra Lust (American adult star); Miles Parks McCollum aka Lil Yachty (American rapper); Shaffer Smith aka Ne-Yo (American singer, songwriter) and finally Aliaune Thiam aka Akon (American singer).

The SEC charges against them were part of broader charges against Chinese cryptocurrency entrepreneur Justin Sun and three of his companies: Tron Foundation Ltd, BitTorrent Foundation Ltd, and Rainberry Inc (formerly BitTorrent) for the unregistered offer and sale of the crypto asset securities Tronix (TRX) and BitTorrent (BTT).

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SEC charges

The SEC also charged Sun and his companies “with fraudulently manipulating the secondary market for TRX through extensive wash trading, which involves the simultaneous or near-simultaneous purchase and sale of a security to make it appear actively traded without an actual change in beneficial ownership, and for orchestrating a scheme to pay celebrities to tout TRX and BTT without disclosing their compensation.”

The eight celebrities were charged for illegally touting TRX and/or BTT without disclosing that they were compensated for doing so and the amount of their compensation.

The SEC’s complaint, filed in US District Court for the Southern District of New York, alleges that Sun and his companies offered and sold TRX and BTT as investments through multiple unregistered “bounty programs,” which directed interested parties to promote the tokens on social media, join and recruit others to Tron-affiliated Telegram and Discord channels, and create BitTorrent accounts in exchange for TRX and BTT distributions.

The complaint further alleges that Sun, BitTorrent Foundation, and Rainberry offered and sold BTT in unregistered monthly airdrops to investors, including in the United States, who purchased and held TRX in Tron wallets or on participating crypto asset trading platforms. According to the complaint, each of these unregistered offers and sales violated Section 5 of the Securities Act.

The SEC also alleges that Sun violated the antifraud and market manipulation provisions of the federal securities laws by orchestrating a scheme to artificially inflate the apparent trading volume of TRX in the secondary market.

“This case demonstrates again the high risk investors face when crypto asset securities are offered and sold without proper disclosure,” said SEC Chair Gary Gensler. “As alleged, Sun and his companies not only targeted US investors in their unregistered offers and sales, generating millions in illegal proceeds at the expense of investors, but they also coordinated wash trading on an unregistered trading platform to create the misleading appearance of active trading in TRX.

“Sun further induced investors to purchase TRX and BTT by orchestrating a promotional campaign in which he and his celebrity promoters hid the fact that the celebrities were paid for their tweets,” said Gensler.

Investor protection

“While we’re neutral about the technologies at issue, we’re anything but neutral when it comes to investor protection,” said Gurbir S. Grewal, Director of the SEC’s Division of Enforcement.

“As alleged in the complaint, Sun and others used an age-old playbook to mislead and harm investors by first offering securities without complying with registration and disclosure requirements and then manipulating the market for those very securities,” said Grewal.

“At the same time, Sun paid celebrities with millions of social media followers to tout the unregistered offerings, while specifically directing that they not disclose their compensation,” said Grewal. “This is the very conduct that the federal securities laws were designed to protect against regardless of the labels Sun and others used.”

With the exception of Cortez Way and Mahone, the celebrities charged today agreed to pay a total of more than $400,000 in disgorgement, interest, and penalties to settle the charges, without admitting or denying the SEC’s findings.

SEC crackdown

The SEC is increasing its efforts to crack down on the crypto industry, which have gathered pace after November’s collapse of Sam Bankman-Fried’s cryptocurrency exchange FTX, as well as the TerraUSD cryptocurrency earlier in 2022.

Last year the US financial regulator added 20 dedicated positions to its unit responsible for enforcement in cryptocurrency and related markets, in order to tackle problems in the crypto sector.

Earlier this week for example, a report alleged that crypto trading app iEarn Bot appeared to be a massive scam drawing in thousands of investors in multiple countries.

Meanwhile last month it was revealed that Paxos, the company behind Binance USD, was in ‘constructive’ talks with the US SEC.

That came New York City-based Paxos said it would stop minting the BUSD token after receiving an order from the New York Department of Financial Services.

The UK and European Union, as well as Hong Kong and other governments, are planning stronger cryptocurrency regulations in order to bring the digital assets out of their current legal grey area.