As FaZe Clan members and influencers such as Youtuber Bryan Quang “RiceGum” Le and Sommer Ray, who were involved in promoting the fake crypto token charity Save The Kids, deal with the fallout from their involvement (Frazier “FaZe Kay” Khattri was removed from the organization on July 1, while three others were suspended), the community has speculated on what if any civil and legal penalties may await them from various federal and state agencies.
To explore some of the potential legal ramifications of being involved in questionable altcoin schemes like Save The Kids, The Esports Observer spoke to attorneys Cory Kirchert and Adriaen Morse Jr. of D.C.-based law firm Arnall Golden Gregory, both of whom work in the firm’s Litigation, Securities Enforcement, and Government Investigations and White Collar Crime practice.
The possible legal ramifications of promoting a dubious crypto charity
While both Kirchert and Morse would not definitively call the Save The Kids token promoted by high-profile influencers and FaZe members a “charity fraud,” both agreed that all the signs point to it being a likelihood. In reviewing material on the charity one of the first things Kirchert noticed was that Save The Kids’ name and logo were suspiciously identical to the global children’s charity, Save The Children.
“If you look at the Save the Children logo and the Save The Kids logo they are incredibly similar,” Kirchert said. “The Save the Children logo has a child in red with a red outline circle holding hands up and the Save The Kids has a heart over the head and the heart on the chest of the icon. To me, it looks like this was probably a charity fraud from the get-go.”
As to what civil and criminal liability influencers could potentially face related to the Save The Kids charity token is largely dependent on their involvement and complicity in it. Were they involved in its actual creation? Were they given a large number of tokens for free or at a discount in a pre-market sale to promote the alt-coin? Did they plan to dump a large amount of these tokens once the volume on it reached a certain threshold (a “pump and dump” scheme)? The answers to these questions will dictate what punishments might await them including serious jail time, fines, and other penalties.
“I don’t think the cryptocurrencies that were mentioned [here] are necessarily securities, which would take them outside the context of SEC jurisdiction and more into the context of a federal or state prosecutor, going after these people for participating in a fraud; like the types of statements about ‘We’ve got this entire whale mechanism in there and nobody can sell more than 20% in 24 hours,’ which turned out not to be true, or that ‘this is a real charity and we stand behind it,’ which wasn’t true either,” Morse said. “Those are the false statements that induced people to follow the direction of endorsers and purchase this cryptocurrency because they think it’s for something in particular but that turns out to be a lie, that’s kind of the definition of fraud.”
“Let’s just assume there are two different scenarios: One is that they were the ones who created this bogus charity, and in that case, you’ve got a much bigger fraud problem,” Kirchert said. “One is civil, which could involve the FTC. If these tokens are considered commodities, that might involve the CFTC (Commodity Futures Trading Commission), and if they’re considered securities then you’ve got the SEC involved. So you have at least three agencies potentially involved in this for different reasons. The SEC would be involved because these tokens are reportedly securities, the CFTC might be involved because these tokens are purportedly commodities, and the FTC would be involved because of the advertising aspect. But those would all be the civil side. If I were representing these people I’d be more concerned about the federal criminal consequences.”
Kirchert points out that if the Department of Justice or the FBI were to catch wind of this case it might use mail and wire fraud, conspiracy to commit mail and/or wire fraud, and charity fraud statutes to charge individuals criminally. Civil penalties could also happen on their own or in tandem with criminal charges from various state and federal agencies.
Charity Fraud is probably the most serious charge of all: Someone convicted of the crime could face a $1 million fine and up to 30 years in prison. In addition, they could also be charged with money laundering, which carries a penalty of 20 years in prison and fines up to $500,000 or more.
Wire fraud and mail fraud each carry a 20 years prison sentence and a fine, while garden variety federal fraud charges can carry a 10+ year sentence and a fine. Conspiracy to commit wire and mail fraud each carries a sentence of 20 years in prison and a fine. A majority of these charges also include restitution in addition to fines.
All of this could be enhanced by civil penalties from different agencies; it could force those convicted of a crime or a civil order to be barred from Internet use (similar to what happens when someone is convicted of a crime related to hacking), or trading commodities or securities, as examples. An individual convicted of a felony in the U.S. that is here on a work visa or a green card could also be deported back to their country of origin after they serve their sentence as well. The civil and criminal penalties related to this particular charity could come from federal or state agencies and law enforcement.
Morse points out that multiple investigations from several government agencies could be a possibility that tackles both civil and criminal charges: “It’s not all that unusual for the FTC to look into something and then also have the Department of Justice also investigate it criminally in parallel actions.”
SEC and FTC rules on endorsements and promotions
Even if everyone involved in the Save The Kids charity scheme were unknowingly duped, if they were doing promotional work for the charity or other crypto tokens (and not highlighting the fact that it is an endorsement or promotion) they could face some FTC violations. Both Kirchert and Morse noted that, while the SEC may not be consistent in its messaging or enforcement of securities rules on cryptocurrency (particularly altcoins) because it is a vast enterprise that the agency may be struggling to get a handle on, it has in the past conducted investigations in the space.
Finally, while both Kirchert and Morse acknowledged that they are not FTC experts and are relying only on their general knowledge of the agency and its guidelines, they note that the rules are not dissimilar to the SEC’s position on disclosures when promoting a particular product or service.
“The FTC does have rules about social networking and so on, and they’re not so dissimilar from the SEC rules, namely that if you’re getting paid for your opinion, you need to disclose it pretty much,” Kirchert said. “The SEC’s rule is really the same rule that you have under the Securities Act 17 B. It says if you write about how much you like something you bought on your own and you’re not being rewarded, you don’t have to worry, but if you’re doing it as part of a sponsored campaign or you’re being compensated, for example, even getting a discount on a future purchase, then disclosure is required. So the whole idea here is the same as it is with any item, is that if your purpose in promoting something may have some financial incentive, then you need to tell people.”
Why does this matter? Because influencers that push altcoins while being compensated often use the #NotFinancialAdvice hashtag in tweets, but never some sort of designation like #AD to comply with FTC and SEC rules.