Taking A Punch

Taking A Punch

What do you get when you combine a celebrity boxing champ, a popular DJ and an executive who rents out exotic cars?  If images of a lime green Lamborghini and diamond-encrusted platinum bling come to mind, you’re a bit off base, though no one would blame you.  Rather, you get a digital currency fraud that allegedly bilked innocent investors out of at least $32 million.  That’s according to the Department of Justice and the SEC, to whom the boxer and DJ recently agree to pay disgorgement and civil penalties totaling $770,000 to settle antifraud charges.  The exotic car executive didn’t fare so well.

On November 29, 2018, the SEC announced that it had settled charges against Floyd “Money” Mayweather and Khaled Khaled, otherwise known as “DJ Khaled,” whose company takes its name from his ubiquitous boast, “We The Best Music.”   According  to orders instituting separate cease and desist proceedings against the two celebrities, a Miami based entity named Centra Tech, Inc. (“Centra”) paid them to promote Centra’s digital coin offering, which neither they nor the company disclosed.  According to an earlier filed civil complaint, the offering was conducted to raise funds to support Centra’s development and operation of a digital wallet that would support a debit-like card, allegedly to be issued on the Visa and Mastercard networks.  The card purportedly would allow holders of various cryptocurrencies to make purchases and withdrawals against their currency balance.  Purchasers of Centra’s coins, or “tokens,” would participate in Centra’s earnings from user transactions. www.sec.gov/litigation/complaints/2018/comp24117.pdf

Mayweather allegedly was paid $100,000 to promote Centra’s card and coin offering and Khaled allegedly was paid $50,000.  Mayweather also promoted two other digital coin offerings, receiving $100,000 for each.  Both men used social media for their promotions, Mayweather targeting his 21 million Instagram followers and 7.8 million Twitter followers while Khaled targeted his 12.4 million Instagram followers and 3.9 million Twitter followers.  Mayweather’s promotions included a picture of him holding a Centra card at a shoe store over the quote: “Spending bitcoins ethereum and other types of cryptocurrency in Beverly Hills with my Titanium Centra Card,” and urging followers to participate in Centra’s coin offering.

A few days later, a second picture showed Mayweather standing over a table on which all of his boxing championship belts were displayed, notifying followers that Centra’s offering would be starting “in a few hours.  Get yours before they sell out.  I got mine . . . .”  Centra retweeted Mayweather’s tweet.  In a third, video promotion, Mayweather was shown purportedly using a “Centra Wallet” app on his phone and a Centra card to make purchases.  Khaled’s promotion included a picture of him holding a Centra card, referring to it as a “titanium centra debit card” and calling it a “game changer.”  The problem for both men, according to the SEC’s complaint, was that Centra had no relationship with either Visa or Mastercard, raising a question as to whether such a card even existed.

Centra’s three founders, all of whom were formerly associated with an exotic car rental company,  were arrested earlier this year and charged with a raft of fraud related charges, including securities fraud.    It was only a matter of time before the upscale world of financial technology – or “fin tech” as its known within the industry  – headquartered in and origination from Crypto Valley, otherwise known as Zug, Switzerland – which is literally a valley surrounded by mountains – would move sufficiently down market to the flashy shores of South Beach where the Sultans of Bling wield influence.   In addition to the promotional fees they agreed to disgorge, Mayweather and Khaled were each assessed a civil penalty, $300,000 in Mayweather’s case ($100,000 for the promotional fee received from Centra and $200,000 from two other digital coin promotions) and Khaled $100,000, as well as prejudgment interest.

 

The lessons to be learned here reaffirm two well-worn and wise principles: 1) always disclose potential conflicts of interest, such as when being paid to promote something, and 2) when boxers and DJs “get in” and start promoting a financial investment, its time to “get out.”

 

Ron Wood

Ron Wood

Ron Wood is a partner with Brown White & Osborn LLP. A former Assistant Director in the SEC's Division of Enforcement, Executive Director in the Law Division at Morgan Stanley, and litigation partner with Proskauer LLP, he practices securities law with a focus on regulatory and enforcement matters. He also conducts internal investigations and complex commercial litigation.
Ron Wood