Investors Sue Sequoia, Paradigm, And Thoma Bravo For Promoting FTX Legitimacy

Investors of the now-bankrupt cryptocurrency exchange, FTX, have taken legal actions against venture capitalists and equity firms that supported the crypto exchange. The FTX users allege that these equity firms falsely promoted the legitimacy of FTX.

Bloomberg’s report on the class-action lawsuit filing noted that the embittered investors listed Sequoia Capital, Thoma Bravo, and Paradigm among the defendants.

Equity Firms Falsely Promoted Failed Exchange, Says Investors

The lawsuit filing cited a 2021 marketing campaign organized by the venture capital and equity firms promoting their million-dollar investments in FTX entities. As per the class-action complaint on Tuesday, the promotions made investors believe in the legitimacy of FTX, only for the firm to go Bankrupt in November 2022.

However, the defendants, Sequoia, Paradigm, and Thoma Bravo, did not give an immediate response to requests for comment by reporters.

These three firms were among those that invested in FTX’s $900 million Series B fund in July 2021, the largest fundraiser in cryptocurrency history. The Series B fund was among the offerings that grew FTX’s portfolio.

After the funding announcement in July 2021, Paradigm’s cofounder, Matt Huang, praised FTX’s CEO, Bankman. In Huang’s words, Sam Bankman-Fried (SBF) is a “special” founder who is stunningly ambitious. By then, the SBF-led crypto exchange had over $32 billion in assets, making it one of the most valuable crypto startups. The three firms, however, attracted criticism for pumping millions into FTX at high prices.

Sequoia And Others Face Criticisms For Supporting FTX

Sequoia, one of the most prestigious firms in Silicon Valley, attracted criticism for bullishly supporting SBF. Sequoia even commissioned a 14,000-word profile about SBF, touting the entrepreneur as a ‘Saviour.’ The profile titled “Sam Bankman-Fried Has a Saviour Complex And Maybe You Should Too” attracted mockery to Sequoia after the FTX implosion.

Meanwhile, Sequoia wrote down the value of its $214 million investment in FTX after the crisis with a message in November. In its statement, Sequoia wrote that they are in the business of taking risks, and some investments yield profits while some lead to losses.

On the other hand, Thoma Bravo invested over $100 million in SBF-led crypto exchange, while Paradigm invested over $250 million. So, the defendants are top investors in the crypto exchange and leveraged their professional reputations and media outreach to present FTX as a trustworthy and legitimate business.

According to the latest class-action filing in a Federal Court in San Francisco, the venture firms claimed they conducted due diligence on FTX operations. They vouched that the platforms were secure, which made the investors trust them with their funds.

The investors accused the firms of violating various state and federal laws, including false advertising, civil conspiracy, and misrepresentation. Other earlier suits targeted celebrities who promoted the crypto exchange, claiming the exchange’s endorsers, including Stephen Curly and Tom Brady, deceived and lured ignorant investors.

However, crypto lawyer Liam Hennessy, a partner at an Australian Law firm, Gadens, commented on the matter. Hennessey claims the case is tricky and questions the defendants’ obligations to the investors.

In his view, even though Sequoia and others didn’t conduct proper due diligence, it doesn’t make them liable to the investors. Hennessey thinks it could be like a “Buyers Beware” case since there is no evidence that the firms didn’t comply with regulatory rules.