Latest FTX lawsuit casts investors Sequoia, Thoma Bravo as co-conspirators
By Alison Frankel
Feb 15 (Reuters) – (The views expressed herein are those of the author, a columnist for Reuters.)
Mutual funds Sequoia Capital Operations LLC, Thoma Bravo LP, and Paradigm Operations LP injected $550 million into Sam Bankman-Fried’s FTX companies before the crypto exchange went bust last November. The funds now all belong to the legions of creditors in the FTX Chapter 11 bankruptcy.
But according to a newly proposed class-action lawsuit, Sequoia, Thoma Bravo and Paradigm were not victims of FTX’s alleged fraud.
Instead, according to the lawsuit filed by a former FTX client, the three venture and private equity funds were involved in FTX’s scheme and funded the platform’s PR blitz to lure crypto clients so they could see the value of their own early Investments in Bankman -Frieds entities.
Without the credibility of these highly respected investors, who hailed FTX and Bankman-Fried as trustworthy outliers in an industry rife with fraud, FTX’s valuation would not have gone from about $1.2 billion to $32 billion in the three years leading up to its collapse -dollars skyrocketed. the complaint holds.
The proposed class-action lawsuit, filed in federal court in San Francisco, alleges the funds violated California state securities, business practices and advertising laws and engaged in a civil conspiracy to trick crypto customers into adding accounts to open FTX. (A judge must later decide whether to proceed with the case as a class action.)
Neither fund has responded to requests for comment from me or my Reuters colleague Jon Stempel. A spokesman for Bankman-Fried declined to comment on the new case, which was filed by prominent securities gathering firm Robbins Geller Rudman & Dowd.
The legal theory of the lawsuit appears to conflict with the theory advanced by the Securities and Exchange Commission in its December 2022 lawsuit against Bankman-Fried. As I reported at the time, the SEC alleged that FTX’s founder deceived investors who bought FTX stock in a series of offerings between 2019 and 2022. She doesn’t name those investors, but the description fits Sequoia, Thoma Bravo, and Paradigm, among others.
In other words, the SEC claims that investors were unaware that Bankman-Fried was orchestrating a colossal scam. In contrast, the newly filed private lawsuit argues that Sequoia, Thoma Bravo and Paradigm either knew, or should have known, that Bankman-Fried was misusing customer funds. (The SEC’s case against the FTX founder and a parallel lawsuit filed by the US Commodity Futures Trading Commission (CFTC) were stayed this week pending the completion of the US Department of Justice’s criminal case.)
Robbins Geller’s partners, Shawn Williams and Stuart Davidson, did not respond to my email inquiry about the different theories behind their lawsuit and the SEC case.
The potential class-action lawsuit says at least one CFTC commissioner, Christy Goldsmith Romero, believes Sequoia was aware that FTX would encourage the fund’s investment in the platform to build trust and credibility with customers. In a speech last month cited in the new complaint, Romero said Sequoia “at least knew” that its equity stake in FTX would be part of a public relations “war chest” to make the exchange the most trusted name in crypto .
The new complaint goes significantly further than that of the CFTC commissioner and includes a series of public statements, including press releases, blog posts, tweets and podcasts, in which Sequoia executives touted Bankman-Fried as a visionary. Thoma Bravo director Orlando Bravo similarly praised the FTX founder in press appearances, industry conferences and social media posts, the complaint said.
Paradigm, meanwhile, had a circular trading relationship with FTX, according to the complaint. It accepted a $20 million investment from FTX-affiliated trading firm Alameda Research for its own crypto-centric venture fund – then flipped and invested money from that venture fund in an FTX equity round. Paradigm wasn’t quite as raving about FTX as Sequoia and Thoma Bravo, according to the complaint, but praised FTX in at least two press releases.
All funds, the class action lawsuit alleges, should have known that FTX was not the safe haven they made it out to be. “If the defendants had conducted the due diligence activities they allegedly conducted in relation to FTX, such activities would have informed them of FTX’s wanton fraud and self-dealing and its complete lack of internal controls and authority.” said of the complaint.
The new case is the first to target FTX stock investors as defendants. Previous lawsuits, as I told you, have focused on FTX executives, accountants, banks, and famous “brand ambassadors” who promoted the exchange.
If you closely follow private litigation surrounding the FTX collapse, you know that the location Robbins Geller chose for the new class action lawsuit is also important.
A dispute is brewing among complaining firms as to where and if FTX customer complaints should be consolidated into a single forum. Attorneys conducting class action lawsuits against prominent FTX supporters in a Miami federal court, including Boies Schiller Flexner, asked a special panel of federal judges last week to move all private FTX-related lawsuits to Florida, where they are well-positioned for appointment conduct the litigation.
But a competing group of firms has proposed consolidating several cases involving FTX customers before San Francisco US District Judge Jacqueline Scott Corley. These firms have asked Scott Corley to approve a governance structure that does not include the Miami litigating firms.
Robbins Geller appears to have sided with the California crew. The cover of the new class action lawsuit notes that the lawsuit against Sequoia, Thoma Bravo and Paradigm is related to the FTX customer lawsuits prior to Scott Corley. Interestingly, three previous FTX customer lawsuits seeking class action status with Silvergate Bank as a defendant have just been refiled in federal court in San Francisco after plaintiffs’ attorneys voluntarily dismissed their original Silvergate lawsuits, which were filed in federal court in San Francisco Diego had been submitted. (Silvergate did not respond to an inquiry about the newly filed cases.)
In other words, it appears that plaintiffs’ attorneys, with the notable exception of the Miami litigants, believe that San Francisco is the best place to pursue private claims for FTX clients.
Continue reading:
FTX clients are suing financiers for lending a “touch of legitimacy” to the bankrupt crypto exchange
Boies, co-counsel, tries to take control of all private FTX cases
US Judge Stays SEC and CFTC Cases Against FTX’s Sam Bankman-Fried (Reporting by Alison Frankel; Editing by Leigh Jones)