When Influencers Are Sued for Illegal YouTube Promotions, Who Is to Blame?

Eight influencers are defendants in a lawsuit for promoting failed crypto exchange FTX on YouTube. Does YouTube bear any responsibility?

Kevin Paffrath wears a suit in front of a brick wall.
YouTuber Kevin Paffrath a defendant in a lawsuit regarding FTX. AFP via Getty Images

An FTX investor filed a lawsuit against eight YouTube influencers who promoted the failed cryptocurrency exchange on their platforms. The suit also lists Creators Agency, a talent management agency, and its founder, which represented some of the influencers. Edwin Garrison, the plaintiff representing all FTX investors, is seeking $1 billion in damages.

The content creators promoted the now collapsed FTX exchange and its unregistered securities for their own or FTX’s financial benefit, according to the lawsuit. They allegedly accepted undisclosed payments from tens of thousands to millions of dollars to do so. The defendants, who are well known on YouTube and include Graham Stephan, Andrei Jikh and Jaspreet Singh, reached a combined total of 13.6 million followers.

“Influencers played a major role in the FTX disaster and in fact, FTX could not have arisen to such great heights without the massive impact of these Influencers,” the lawsuit reads. FTX lost $8.9 billion in consumer funds, according to the Wall Street Journal.

The lawsuit is part of a larger push by the U.S. Securities and Exchange Commission (SEC) and private investors to hold cryptocurrency companies and other financial institutions—and the celebrities that endorse them—accountable. Garrison previously filed a suit against Tom Brady, Stephen Curry, Larry David and other stars for promoting FTX to “unsophisticated investors” in November. Kim Kardashian settled a $1.26 million lawsuit with the SEC last year for promoting a cryptocurrency token on Instagram without disclosing she was paid to do so. The Department of Justice and the SEC filed suits against eight Twitter influencers in December for allegedly running a pump-and-dump stock scheme worth $114 million.

As advertisers increasingly rely on social media influencers to promote their products, internet stars are reaching the fame and status once exclusive to actors, musicians and athletes. As a result, influencers are increasingly found at the center of high-profile legal battles over the content they post. The barriers for internet stardom are low, with creators able to build followings in short periods of time. But they are relatively alone in doing so, especially at the beginning of their careers. There is no onboarding process to become an influencer. There’s no human resources department or employee handbook to educate them on what is and isn’t allowed. While creators are ultimately responsible for themselves—especially when choosing to accept money for a sponsorship—the lawsuit begs the question of whether  platforms should be doing more to educate their creators.

Is YouTube responsible for educating its influencers on laws?

YouTube isn’t legally responsible for educating influencers on the laws, because Section 230 of the Communications Decency Act protects the platform from the content posted on it, said Enrico Schaefer, founding attorney at Traverse Legal who specializes in internet law. But YouTube has incentives for doing so, he said. Legislators are considering reforming Section 230, which could put social media platforms at risk. YouTube did not respond to a request for comment.

What assistance YouTube does offer is limited and at times confusing. YouTube’s Help Center tells influencers they should follow local laws regarding the promotion of financial services, but leaves it up to creators to find them. It gives one example of a promotion that is allowed in the U.S. and three examples of promotions that aren’t.

“YouTube doesn’t want to be in the business of trying to provide legal guidance,” said Nicole Haff, a lawyer at Romano Law.

The suit alleges the influencers broke U.S. securities law, but also accuses them of violating Federal Trade Commission (FTC) guidelines about disclosing pay for promotions. To follow FTC guidelines, the YouTube Help center tells creators they have to check a box in their video that discloses when it includes a paid promotion, so YouTube can flag it to viewers. Finding this page means creators have to search for it through the help center, and the page doesn’t clarify if checking the box is enough to satisfy FTC guidelines. Instead, it directs U.S. users to the FTC’s homepage. An article published by YouTube in 2016 tells creators checking the box is optional.

Most influencers don’t know these guidelines exist, don’t care and don’t comply, Schaefer said. “So this very generalized webpage and the ability to select the paid promotion box is at the shallow end of the pool in terms of trying to help,” Schaefer said.

“YouTube wants its content creators to have more traffic, and they don’t want to put barriers in the way of getting that traffic,” he said. “YouTube could do a lot better.”

One defendant thought he followed the rules

In a text, Kevin Paffrath, one of the defendants, said he thought he was complying with YouTube’s instructions.

“YouTube solely asks us to check a box if there was a paid sponsorship so they can put a little notice overlay on the video,” Paffrath said. “So that’s what I have done.”

FTC guidelines don’t outline to what extent creators have to disclose their paid partnerships on each social media platform, but checking the box on YouTube generally isn’t enough, said Nycole Kelly, who heads client strategy at the Outloud Group, an influencer marketing agency that specializes in YouTube. Kelly encourages the creators she works with to add voiceovers telling viewers a product was paid for, a link in the description box and a hashtag “ad” in the description. But even if Paffrath’s action did comply with FTC guidelines, it still doesn’t allow for the sale of unregistered securities.

Another defendant, Ben Armstrong, said on Twitter he never had contact with anyone at FTX. “Countersuit coming,” he tweeted. Armstrong, as well as the other defendants, did not respond to requests for comment. When Influencers Are Sued for Illegal YouTube Promotions, Who Is to Blame?