It was only a matter of time before frustrated customers of the fallen crypto exchange FTX went after the lenders. Indeed, the most surprising thing about a class action lawsuit previously marked by Bloomberg – one accusing Sequoia Capital, Paradigm and Thoma Bravo of promoting FTX to the detriment of its users – is that it was filed yesterday and not before.
Still, VCs at any company had better hope that nothing comes of it or that the entire venture industry is in deep trouble. A lawsuit – even a settlement – can have major consequences.
Here’s the potential problem: The new complaint specifically accuses the three firms of giving FTX the “air of legitimacy” through their various actions, including a glowing piece about FTX founder Sam Bankman-Fried commissioned by Sequoia Capital (and later removed from his company). website), a startup grind event last year where Sequoia partner Michelle Bailhe interviewed Bankman-Fried for a session titled “The Unstoppable Rise of FTX,” and encouraging tweets from Paradigm co-founder Matt Huang and Thoma Bravo founder Orlando Bravo. (In response to a tweet from MicroStrategy Michael Saylor warning people to “Only trade #bitcoin on a legitimate exchange you trust,” Bravo tweeted to his Twitter followers: “Only trade #bitcoin with @FTX_Official.”)
The legal complaint also referenced several media outlets that quoted these investors as singing Bankman-Fried’s praises, including a MarketWatch piece that quoted Bravo as saying that Bankman-Fried “combines being a visionary with being a phenomenal operator. . . That is rare.”
Nothing mentioned in the complaint is new information. All this makes the investors look stupid in hindsight. None of it suggests that the investors have done anything unusual in terms of their public comments. They have actively promoted an investment, and is there one investor who is not doing the same? Look at Twitter or businessroundups.org or Bloomberg TV almost any time of the day and you will see or read investors whining about how great their portfolio companies are.
Is such a promotion a crime? If so, the entire industry is to blame. VCs see part of their “added value” as helping to expand the brand of the startups they fund. They’ve been “talking their book” since the industry took off many decades ago. With the advent of social media, it only got much more annoying.
Does it prove that these particular investors were trying to dupe someone – that they were trying to draw attention to an exchange they secretly thought was a house of cards? I’m not a lawyer, but I really doubt it. More importantly, I don’t see that case being made in the filing (see below).
There is no doubt that the institutional investors in FTX have screwed it up royally. The three companies named in this new lawsuit alone lost a staggering $550 million on FTX, which has since been accused of orchestrating “old-fashioned embezzlement” by the attorney-CEO who is now guiding the company through bankruptcy.
But VCs don’t tend to screw it up on purpose; public humiliation is not good for business. You could argue that Sequoia Capital in particular, despite all the credit it gets for its smart investments, should have known better. FTX is now believed to have freely mixed money with another outfit founded by Bankman-Fried, Alameda Research, right under the company’s nose.
At the same time, Alfred Lin, the Sequoia partner who led the company’s investment in FTX, has explicitly said that the company believes it has been “misled” by Bankman-Fried and that he feels personally cheated by Bankman-Fried, not because of the investment himself, but because he thought he knew Bankman-Fried. “It’s the working relationship of a year and a half after that that I still didn’t see it. And that is difficult,” said Lin an event I organized last month.
When asked about Sequoia’s due diligence, he defended it, suggesting there’s little a venture firm can do if it isn’t presented with the whole picture by a founder. “We looked at the balance sheets, we looked at the organizational charts of the subsidiaries, we looked at how [big a percentage] Alameda was of the volume of FTX. We looked at different things. The Alameda company we knew was a hedge fund. We knew they were trading on FTX. But it wasn’t on any of FTX’s org charts. [And] when we asked, “Are these two companies independent?” We were told they were.
The new lawsuit is led by San Diego law firm Robbins Geller Rudman & Dowd.
In 2014, the same law firm helped force a $590 million settlement between three private equity firms — Kohlberg Kravis Roberts, The Blackstone Group and TPG Capital — after they were accused of colluding with each other to drive down the prices of corporate takeover targets .
We reached out to the company last night for comment on its FTX-related lawsuit and have yet to hear anything. A report has now been filed another class action lawsuit against Avaya Holdings, a business communications company that filed for bankruptcy yesterday, five years after emerging from its previous bankruptcy.
Pictured above: Alfred Lin of Sequoia Capital at a businessroundups.org Disrupt event in 2016
Class action lawsuit filed on behalf of FTX investors Through businessroundups.org on Scribd
