Investment firms Sequoia Capital, Thoma Bravo and Paradigm Operations have been sued for allegedly making deceptive statements while promoting the now bankrupt cryptocurrency exchange FTX.
According to a complaint filed in U.S. District Court for the Northern District of California by former customers of FTX Trading Ltd., Rabbitte v. Sequoia Capital Operations LLC et al., the three firms made “materially false and misleading statements” to promote FTX and induce customers to use its crypto trading platform. The suit alleges the investors “aided and abetted the misconduct that led to the collapse of the FTX Entities.”
The FTX Entities consisted of the FTX cryptocurrency exchange, which was started in 2019 by Samuel Bankman-Fried, and crypto-trading firm Alameda Research, which Bankman-Fried founded in 2017.
FTX and had grown in size from $1.2 billion to $32 billion in three years; however, it all came crashing down in November when cryptocurrency publication CoinDesk published a story that questioned the financial health of FTX as well as Bankman-Fried’s claims that FTX and Alameda were separate entities. Shortly after the story was published, the crypto exchange saw significant customer withdrawals that led to a liquidity crisis and the collapse of the company.
The plaintiffs’ lawyers argue that because Sequoia Capital Operations LLC, Thoma Bravo UK LLP, and Paradigm Operations LP were among FTX’s largest financial backers, they had an incentive to use their reputations and media outreach to portray FTX as a trustworthy and legitimate cryptocurrency exchange.
“FTX’s campaign to build trust relied on significant financial support” from Sequoia, Thoma Bravo and Paradigm, the complaint states. According to the plaintiffs’ lawyers, a key component of the “highly lucrative” promotional marketing campaign included the air of legitimacy lent by the three firms who claimed to have conducted significant due diligence into FTX’s operations and who vouched that its platforms were safe and secure.
“These defendants were part owners of the FTX Entities and had a significant financial interest in promoting the use of the FTX platforms so as to increase the returns on their investments,” the complaint states.
According to the complaint, Paradigm had invested more than $250 million in various FTX entities, while Sequoia and Thoma Bravo invested more than $200 million and $100 million, respectively.
The complaint cites a now-deleted self-published piece on Sequoia’s website that claimed FTX had distinguished itself by its trustworthiness and was backed by “credible sources,” adding that “it was built to be the exchange traders could count on.”
The complaint also says Sequoia publicly referred to Sam Bankman-Fried, FTX’s founder, as “a special founder who is ambitious and daring enough to build the future of crypto by establishing FTX as the global exchange with the best overall product offering and leveraging the world’s crypto rails to build the future of finance.”
The complaint also notes that Alfred Lin, a partner in Sequoia who led the firm’s investments into FTX, said in a press release that FTX was the “high-quality, global crypto exchange the world needs,” adding that it “has the potential to become the leading financial exchange for all types of assets.”
The complaint also cites a Tweet from Orlando Bravo, the founder and managing partner of Thoma Bravo, warning crypto traders to trade Bitcoin only on a legitimate exchange and urging his Twitter followers to only trade Bitcoin with FTX. The complaint also says Bravo was quoted in a news article stating that Bankman-Fried “combines being visionary with being a phenomenal operator.”
Paradigm is also accused of deceptively touting Bankman-Fried as “one of those special founders whose vision is both stunningly ambitious and uniquely adapted to the future of crypto.” The complaint says Paradigm continued to promote FTX’s global platform throughout 2022, with a spokesperson describing Paradigm as fortunate to be an investor in FTX.
The complaint also cites a speech at the University of Pennsylvania’s Wharton School of Business and Carey Law School in January in which Commodities Futures Trading Commissioner Christy Goldsmith Romero said, “FTX appears to have used Sequoia as a credibility and trust enhancer,” and “It appears that Sequoia at least knew its money would be used in this fashion.”
Thoma Bravo declined to comment. Representatives from Sequoia Capital, and Paradigm did not immediately respond to a request for comment.
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Tags: Bankruptcy, Class Action, collapse, Cryptocurrency, cryptocurrency exchange, FTX, Lawsuit, Paradigm Operations, Private Equity, Sam Bankman-Fried, Sequoia Capital, Thoma Bravo, Venture Capital