SEC Charges Tron founder Justin Sun, Multiple Celebrities, With Fraud & More

Sun and three of his fully owned businesses, Tron Foundation Limited, BitTorrent Foundation Ltd., and Rainberry Inc. (previously BitTorrent), were accused of selling crypto asset securities, including Tronix (TRX) and BitTorrent (BTT), without first registering their offers .

Prominent in the charges were allegations of extensive wash trading – which involves the simultaneous or nearly simultaneous purchase and sale of a security to make it appear actively traded without an actual change in beneficial ownership. The SEC also accused Sun and his companies of orchestrating a scheme to pay celebrities to promote TRX and BTT. The SEC simultaneously filed charges against the eight celebrities listed below for endorsing TRX and/or BTT while failing to disclose they were being paid to do.

• Lindsay Lohan
• Jake Paul
• DeAndre Cortez Way (Soulja Boy)
• Austin Mahone
• Michele Mason (Kendra Lust)
• Miles Parks McCollum (Lil Yachty)
• Shaffer Smith (Ne-Yo)
• Aliaune Thiam (Akon)

The charges are particulary galling, given Sun’s denial at the time that the endorsments were paid for. In February 2021 it was reported that a “Tron partner” was offering to pay celebrities to promote the project on social media. Jake Paul, Lohan and the others all participated in the campaign by bullishly tweeting about the Tron blockchain or its native TRX token.

The campaign was controversial at the time because of it clear absence of proper disclosure from all involved – as required by the US Federal Trade Commission guidelines for influencers promoting products through social media. The guideline states “if you endorse a product through social media, your endorsement message should make it obvious when you have a relationship (“material connection”) with the brand." The FTC says the onus is on influencers to make these disclosures.

The celebrity endorsers were outed when popular tech review YouTuber Marques Brownlee revealed that the team behind the campaign had also asked him to mention Tron on Twitter but said that he “need not make it look like a sponsored tweet”.

During his “Dogecoin: explained” video Brownlee shared screenshots of email interactions between himself and the team behind the Tron celebrity/influencer endorsement campaign.

The emails come from someone who says they are a partner of Tron, which they then refer to as “one of the largest crypto projects in the space with the faster blockchain that’s often referred to as the ethereum killer”. It asks if Brownlee can “openly” tweet on what he thinks of Tron and post it. The promoter says he will be compensated for his “honest opinion.”

The emails included some example tweets from Lindsay Lohan, NeYo, and Lil Yachty promoting Tron to their followers without acknowledgement of an endorsement. One celebrity who participated in the campaign, Amanda Cerny, did more clearly disclose a relationship with Tron by tagging her tweet about Tron’s low gas fees with #TronPartner. Cerny has not been charged by the SEC. Lindsay Lohan and NeYo both made their tweets on February 12th, 2021. In the following week the price of TRX rose ~30%.The TRX price surged after the celebrity Twitter campaign.

At the time Justin Sun denied that the now charged Tron Foundation, the non-profit organization which he runs that oversees the Tron project, was behind the campaign.Source: Justin Sun Twitter

Sun has long used celebrities to promote Tron. The Chinese language version of the Tron website prominently featured pictures of him posing with Kobe Bryant (for years after Bryant died in a helicopter crash in January 2020), and Jack Ma. Source: Tron website

A relentless self promoter, Sun once told Bloomberg “Elon Musk is not only a company CEO, but he is also the representative of this kind of meme culture and the representative of this kind of new generation movement. In the future, these kinds of community-driven trends require company CEOs to be more engaged with the community, with their fan base.” Sun may have modeled himself on Musk and Jack Ma but he is yet to build products that have captured the hearts and minds of communities in the way that Telsa or SpaceX have.

Instead, the value of the TRX token has been buoyed by a never ending hype cycle and, as the SEC charges allege, criminal market manipulation.

The Commission asserts that Sun orchestrated a conspiracy to fraudulently inflate the apparent trading volume of TRX in the secondary market, in violation of the antifraud and market manipulation sections of the federal securities laws. It says between 4.5 million and 7.4 million TRX were wash traded each day.

Between at least April 2018 and February 2019, Sun is accused of ordering his staff to execute more than 600,000 TRX wash trades between two crypto asset trading platform accounts he controlled. This program needed a large amount of TRX, which Sun is said to have supplied. As claimed, Sun also sold TRX into the secondary market, earning $31 million from unauthorized, illegal token offers and sales.

“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 U.S. 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.”

Of the celebrities accused today, all except Cortez Way and Mahone, while neither admitting or denying the SEC’s claims, have quickly agreed to pay a combined total of more than $400,000 in disgorgement, interest, and penalties to settle the claims.