De’Aaron Fox Swipes Money from Fans in an NFT “Rug Pull”

Photo via: Next NFT Drop

Sacramento Kings’ star point guard, De’Aaron Fox, is facing backlash over seemingly defrauding fans over a failed NFT project, collecting $1.5 million in profit for himself

I. Overview

De’Aaron Fox, star point guard for the Sacramento Kings, is living up to his nickname, “Swipa the Fox,” a play on words for the notorious “Swiper the Fox” from kids’ television show, Dora the Explorer.

Fox, like many other athletes, entertainers, and influencers, entered the Non-Fungible Token (“NFT”) space — hoping to deliver fans unique digital assets and earn a profit while doing so. Fox succeeded on the latter, but failed on the former. The initial launch of the “Swipa the Fox NFT Collection” was successful for Fox, earning approximately $1.5 million. Yet, Fox curiously halted the NFT collection, citing ill-timing. Fox claims he will circle back to developing his NFT collection after the NBA season.

This instantly brought backlash against Fox, with many likening Fox to Swiper from Dora, stealing from the innocent.

II. Important Terms of the Trade

To fully understand this situation, it is imperative to know common terms in the digital asset space.

NFT: an NFT is a digital asset on a “blockchain” with unique coding and online data that singularizes each individual NFT. NFTs cannot be traded or exchanged at equivalency and are bought similarly to how any other tangible item that you can think of is purchased — only it exists in the digital world.

In this case, Fox created an NFT project that revolved around the sale of NFTs, a unified Fox NFT community, and more community-based incentives.

Blockchain: an online data library with stored information which securely maintains and decentralizes records of transactions. The practicality of blockchain is it permits data security for recording ownership of an NFT or cryptocurrency without the need for a trusted third party. The blockchain helps verify the authenticity and track the history of a digital asset.

Ethereum: a platform, with its own native cryptocurrency (ether or ETH), that specializes in and is powered by blockchain technology. Ethereum is the second largest cryptocurrency in the market, behind only Bitcoin. Ethereum differentiates itself from being “just” a cryptocurrency because of its function as a secure blockchain.

Further, when an NFT is recorded on the Ethereum blockchain, the creator of the NFT is recorded in the “public ledger.” A public ledger gives a creator the ability to set a “royalty fee,” meaning every time a creator’s NFT is resold, the creator retains earnings from the sale. Think of the royalties that Jennifer Anniston receives whenever an episode of Friends is shown on television.

The Swipa the Fox NFT Collection used ETH for buyers to purchase NFTs, secured by Ethereum’s blockchain technology.

Minting: simply put, this is how a creator publishes their NFT on a blockchain (such as on Ethereum) for buyers to subsequently purchase the NFT. Minting allows creators to profit from their NFTs.

Smart Contract: a digitally created protocol that executes the terms of a contract. Think of this as a point-of-sale contract in the digital asset space. Smart Contracts are self-executing and the terms of the agreement between the buyer and the seller are directly written into lines of code. This information is subsequently stored in the blockchain and controls the execution of a sale. Importantly, transactions are transparent, traceable, and irreversible.

Rug Pull: a digital asset scam, where creators, or the like, “pump” their NFT(s) and thereafter sell it/them and subsequently abandon the NFT(s) — driving the market value of the NFT(s) down. In essence, it is a pyramid scheme and a major risk of having an unregulated space such as the digital asset marketplace.

III. Background

Attempting to capitalize on the emerging market that is digital assets, Fox, along with his wife, created an NFT concept relating to Fox’s nickname, Swipa — yes, inspired by the children’s show, Dora the Explorer and the character, Swiper the Fox. Fox’s NFT collection provided a roadmap for what Fox planned on releasing after the initial NFT drops.

The initial drops took place on two separate dates, January 11, 2022, and January 13, 2022.[1] The January 11th drop was a limited pre-sale available to “Discord members” only as an “early access drop.” Discord is a community chat platform, and often public figures use Discord to connect with fans.

The early access drop sold 6,005 profile picture (“PFP”) NFTs, which are digital images of different variation of Fox — most PFPs depict Fox as a digital fox animal, wearing a basketball uniform. The early access drop sold out, selling each NFT, on average, for $200.00. (The currency for the buying and selling of these NFTs is ETH, but the numbers will reflect U.S. Dollars for simplicity).

The January 13^th drop was accessible to the general public and Fox labeled it as an “art drop.” The art drop featured five NFTs called “Stories.” Stories are essentially GIFs, and fans who purchased a Story received “Superfan” status. Superfan status grants each purchaser an additional Story NFT and bonus community perks. Stories sold for anywhere between $310.00 and $785.00.

Thereafter, the purchased NFTs went through the minting process. Directly following the minting process, the value of all the NFTs dropped to a third of their initial cost. Strangely, on January 15, 2022 — two days after the secondary drop and mint — records reflect $1,241,973.00 removed from Fox’s NFT project fund and into multiple digital wallets, making it difficult to trace the funds. That left approximately $126,000.00 for the remainder of the NFT roadmap to be completed and left most Swipa the Fox NFT Collection owners panicking.

The roadmap promised other benefits for NFT owners, such as: (i) “Swipa Island,” a digital basketball compound for NFT owners to play and interact with one another using their PFP NFTs as in-game avatars; (ii) an exclusive community of Swipa the Fox NFT Collection users; (iii) live, Sacramento Kings game tickets; (iv) exclusive Swipa merchandise; (v) five scholarships to the University of Kentucky (Fox’s alma mater); and (vi) for an additional $936.00, NFT owners could purchase one-on-one time with Fox.

Unfortunately, Fox never performed on any of the roadmap promises. This includes paying the Swipa Island designer, a digital world design engineer who goes by “Destorian Demigod.” Destorian Demigod alleges that he created a prototype Swipa Island and Fox failed to pay or contact him after its creation.[2] There is no further information on this to prove its validity.

Nonetheless, the failure to contact Destorian Demigod turned into a theme for Fox and his team. By late February, both Fox and a primary Discord moderator — on behalf of Fox — cut ties with the Discord and the Swipa the Fox NFT Collection. This lead NFT owners and outsiders to dub the Swipa the Fox NFT Collection a rug pull.

Fox left the Discord with one final message, citing the inability to give the Swipa the Fox NFT Collection the time it deserves. Fox claims that he will revisit the project after the current NBA season. Fox further informed Discord members that fall under special purchasing criteria that they will receive an autographed jersey from him.

Fox specified that any Discord member falling under certain purchasing thresholds will receive (i) an autographed Fox jersey (the jersey will be purchased using the community funds); (ii) a “Green Team” or Superfan member will be eligible for the “buyback program,” where Fox will repurchase Stories from buyers; and (iii) MVP members will receive additional rewards.

The buyback program is misleading; purchasers must relist the NFTs on a platform called “OpenSea.” On OpenSea — because Fox minted the NFT’s and attached a 10 percent royalty fee — Fox receives 10 percent of what the NFT sells for and OpenSea receives two percent. In other words, Fox is repurchasing the NFTs at a 10 percent discounted rate and purchasers are not being fully compensated (losing 12 percent of its original value). The buyback program will benefit approximately three percent of purchasers and roughly 2,000 remaining purchasers will be left with likely worthless NFTs.

IV. Fox’s Public Statements and Accounts

Fox publicly apologized for his blunder on February 24, 2022, and reiterated his desire to continue working on this project, yet he curiously restricted who can reply to his tweets,[3]

“The project launch was ill timed. I delegated certain aspects to the launch of the NFT in an attempt to partner with professionals. We weren’t happy with the execution & demand on my time and attention during the NBA season.

This project is about a brand that will continue to grow, but I have obligations that I must fulfill to the Sacramento Kings and their loyal fan base. They deserve all of my attention.

As I stated previously, I look forward to doing this again the right way and adding value to my NFT holders. I’m excited to learn from the entire NFT community as well. The project will be updated at the conclusion of the NBA season.”

Fox’s NFT twitter account tweeted on March 4, 2022, that the project will have an update on March 13, 2022.[4] There has been no update. Nonetheless, the statement reiterates Fox’s desire to reproduce the NFT project and that his legal counsel will be “busy with defamation claims.” Fox is attempting to clear his name from any ill will due to the failed project. This will be difficult to do because of Fox’s failure to perform and inability to meet a self-created deadline — an update by March 13th. Fox dug himself into a hole and it is difficult to view this as anything other than a rug pull.

V. Legal Recourse

The issue here is Fox did nothing illegal. It will be difficult for any Swipa the Fox NFT Collection purchaser to take action against him. Purchasers did get what they purchased, an NFT. Although the rug pull deflated the price of the NFT, it is merely unethical, not illegal. Rug pulls are corrupt, but that is an inherent risk NFT purchasers are taking because NFT projects and the like are unregulated, and no entity regulates this market. President Joe Biden recently signed an executive order to help coordinate efforts to regulate digital assets; nonetheless, this will not affect Fox and the Swipa the Fox NFT Collection purchasers. [5]

Despite the technicality defense that Fox will likely plead, purchasers initially can file a class-action lawsuit against Fox. To do so, purchasers would file a complaint in the 9th Circuit Court and must comply with the Federal Rules of Civil Procedure. Purchasers will be referred to as “Plaintiffs” interchangeably throughout this section.

A. Federal Class Action Requirements

Federal Rule of Civil Procedure, Rule 23 governs class action lawsuits and requires a class to (i) typically have more than 15 members; (ii) a common issue amongst the plaintiffs against the same defendant; (iii) the claims of the parties are typical for a part of the particular class; (iv) the representatives of the class will fairly protect the interest of the class.

To put it simply, it must make sense for the plaintiffs to join and carry out a lawsuit against a defendant. In the case of the would-be Plaintiffs against Fox, they would fit the requirements of Rule 23.[6]

Plaintiffs will run into an issue of calculating damages and defining them under a “class basis,” however, California law is more flexible than federal law in this area, and the court may find differentiating individual damages to be permissible in this case.

As for the claims, the Plaintiffs will likely cite (B) breach of contract; and in the alternative, (C) unjust enrichment; (D) fraudulent misrepresentation; (E) California Unfair Competition Law; and/or (F) California Consumer Legal Remedies Act claims.

B. Breach of Contract Elements

The necessary elements a plaintiff must prove are, (i) existence of a contract; (ii) plaintiffs’ performance; (iii) defendant’s breach; and (iv) resulting damages to plaintiffs.[7]

Plaintiffs can point to the Smart Contracts created when they purchase an NFT, and it is minted on the blockchain. Smart Contracts pose interesting nuances for contract law because they are written into the code of the digital asset.[8] Nonetheless, here, the nuances will not affect the court’s likely outcome pursuant to the terms of the contract. For there to be a breach, the Plaintiffs need to prove Fox had some type of obligation to perform beyond delivery of the NFT. This is unlikely, however, given the parties agreed for the sale and purchase of an NFT, not for the speculative price that the NFT would have in the future. Fox performed his contractual duties by exchanging the NFT for monetary compensation.

Yet, the Plaintiffs can successfully plead breach if they can prove Fox failed to perform on the additional promises he claimed the Swipa the Fox NFT Collection would have. However, these promises would need to be explicit in the Smart Contract, which is doubtful.

C. Unjust Enrichment Elements

A plaintiff can plead unjust enrichment in the alternative of a breach of contract claim, but cannot succeed on both. The necessary elements a plaintiff must prove are, (i) defendant’s receipt of a benefit and (ii) the unjust retention of the benefit at the expense of another. Further, “A quasi-contract action, in the form of a common count for money had and received, to recover money obtained by fraud . . . is governed by the fraud statute.” Thus, a plaintiff must plead that a defendant has been unjustly conferred a benefit through mistake/fraud. [9]

Here, the Plaintiffs have a strong case against Fox. The Plaintiffs paid Fox for NFTs that Fox fraudulently represented to be accompanied by a full project surrounding the Swipa the Fox NFT Collection. Yet, Fox failed to perform on the remaining roadmap and abandoned the project all together, while unjustly retaining the profits of a failed NFT project. The Plaintiffs are left with worthless NFTs with little remedy to make them whole. Additionally, for those that Fox will compensate, he is doing it with the remaining money from the failed NFT project and/or repurchasing the NFTs at a discounted rate.

D. Fraudulent Misrepresentation Elements

The necessary elements a plaintiff must prove are, (i) the defendant represented to the plaintiff that an important fact was true; (ii) that representation was false; (iii) the defendant knew that the representation was false when the defendant made it, or the defendant made the representation recklessly and without regard for its truth; (iv) the defendant intended that the plaintiff rely on the representation; (v) the plaintiff reasonably relied on the representation; (vi) the plaintiff was harmed; and (vii) the plaintiff’s reliance on the defendant’s representation was a substantial factor in causing that harm to the plaintiff. [10]

Here, the Plaintiffs can cite Fox falsely presenting NFTs with an accompanying roadmap that would drive the value of the purchased NFTs, the representations that Fox made were false, Fox knew and/or was ignorant to what really was happening with the NFT roadmap, Fox intended for the Plaintiffs to rely on his representations, the Plaintiffs did in fact rely on Fox’s representations, the Plaintiffs were financially harmed as a result, and the Plaintiffs reliance on Fox’s representations were the substantial factors causing harm to the Plaintiffs.

E. California Unfair Competition Law

Federal Law, 28 U.S.C. §1367 permits supplemental jurisdiction in federal courts -meaning federal courts are permitted to adjudicate state law claims if the claim is related to the federal claim asserted.[11] Thus, the 9th Circuit Court can adjudicate the issue on the CA Unfair Competition Law (“UCL”).

In the case of the Plaintiffs against Fox, they will be best served pleading Fox mislead them due to his false advertising of the Swipa the Fox NFT Collection. The necessary elements a plaintiff must prove are, (i) the defendant engaged in unfair, deceptive, untrue, or misleading advertising and (ii) plaintiff must demonstrate that it suffered an injury, by showing loss of money, property, etc. due to the defendant’s actions.[12]

Here, the court will first look to the advertisement as a whole and the impression it left on the relevant Plaintiffs. In this case, that would be Fox’s advertisement as to the whole project — the NFTs and accompanying roadmap — and the impression it left on the Plaintiffs. Next, the Plaintiffs must show they were economically damaged because of the defendant’s advertisement.

F. California Consumer Legal Remedies Act

Pursuant to §1367, the 9th Circuit Court can adjudicate the issue on the CA Consumer Legal Remedies Act (“CLRA”). Plaintiffs will likely plead the CLRA, citing Fox advertised goods with the intent to not sell them as advertised.

The necessary elements a plaintiff must prove are, (i) plaintiff suffered any damages; and (ii) the acts of the defendant caused the damages suffered by the plaintiff.[13]

Here, the court will again look to Fox’s NFT project and roadmap, how/what Fox advertised the project and roadmap, and thereafter the failure of Fox to not sell the NFTs with the accompanying roadmap. Further, the court would find if the Plaintiffs suffered any damages and the accompanying acts of Fox that caused the Plaintiffs damages — the failure and subsequent rug pull by Fox and his team.

VI. Outcome

Hopefully for all parties involved, Fox honors his word and reinvigorates his NFT collection. Fox disappointed fans and is currently viewed as another celebrity influencer who leveraged his persuasive position to profit from his fans. Other notable NFT rug pulls belong to Floyd Mayweather, Paul Pierce, Kim Kardashian, and Lana Rhoades, to name a few.[14]

Fox is set to make $28 million this season (minus any applicable taxes) and thereafter through the 2026 season, his contract will increase to $37 million.[15] The roughly $1.5 million dollar profit Fox will earn from this NFT project is pennies in comparison to his NBA contract. Fox earned himself a wonderful reputation in the NBA and specifically in Sacramento; it would be a shame for him to tarnish his name with this scandal.

Nonetheless, if Fox neglects his NFT collection, Swipa the Fox NFT Collection owners should acquire adequate legal representation and pressure Fox to right his wrong or face legal consequences.

[1] https://www.inputmag.com/culture/nbas-deaaron-fox-postpone-nft-project-investor-sacramento-kings-discord

[2] Id.

[3] https://twitter.com/swipathefox/status/1496949986822664197

[4] https://twitter.com/SwipaTheFoxNFT/status/1499934073111916544?cxt=HHwWgMC55fWF69ApAAAA

[5] https://www.nytimes.com/2022/03/09/us/politics/crypto-regulation-biden.html

[6] https://www.jdsupra.com/legalnews/class-actions-a-brief-comparison-of-38339/

[7] E.D.C. Tech., Inc. v Seidel, 216 F Supp 3d 1012 [ND Cal 2016]

[8]https://www.ilsa.org/ILW/2018/CLE/Panel%20%2311%20-%20THE%20LAW%20AND%20LEGALITY%20OF%20SMART%20CONTRACTS%201%20Georgetown%20Law%20Technology%20Rev.._.pdf

[9] Liou v Organifi, LLC, 491 F Supp 3d 740 [SD Cal 2020]

[10] Broge v ALN Intl., Inc., 17-CV-07131-BLF, 2018 WL 6308194 [ND Cal Dec. 3, 2018]

[11] https://www.law.cornell.edu/wex/subject_matter_jurisdiction

[12] https://www.mandourlaw.com/unfair-competition/