Sequoia Named in Lawsuit for Adding ‘Legitimacy’ to FTX

FTX investors have reportedly sued three investment firms for propping up the bankrupt crypto exchange.

Sequoia Capital, Thoma Bravo and Paradigm are among the venture capital and private equity firms named in the class action lawsuit, Bloomberg News reported Tuesday (Feb. 14).

The suit claims the companies took part in a promotional campaign in 2021 to trumpet their own investments in FTX, adding “an air of legitimacy” to a platform that would soon go bankrupt and turn the cryptocurrency industry on its head.

PYMNTS has reached out to all three firms for comment but has not yet received a reply.

After FTX imploded last year, the Securities and Exchange Commission alleged that the company raised more than $1.8 billion from different equity investors.

Among the biggest contributors were the biggest players in the venture capital field, like Sequoia, which invested $225 million into FTX. The company had previously apologized to investors for its losses related to FTX’s collapse and said it will perform greater due diligence for future investments.

At an industry event last month, Sequoia partner Alfred Lin — who led the firm’s investment into FTX — said that his company had been misled by FTX founder Sam Bankman-Fried.

“We asked, ‘Are these two companies independent?’ and we were told that they were,” Lin said, referring to the thorny connection between FTX and its sister trading firm, Alameda Research — whose poor bets are allegedly at the center of FTX’s downfall.

The lawsuit claims the venture capital firms said they carried out significant due diligence on FTX and vouched for its platforms.

“As a result of defendants’ significant investments in the FTX entities, each was incentivized to leverage their professional reputations and media outreach capabilities to portray FTX as a trustworthy and legitimate crypto exchange,” the complaint says.

In fact, Sequoia went beyond claiming FTX was trustworthy, commissioning a 13,000-word profile of Bankman-Fried — or SBF, as he’s often referred to as — as crypto’s savior.

“Am I talking to the world’s first trillionaire?” the author of the profile asks a Sequoia partner, referring to Bankman-Fried.

“Yes, I think [SBF] has a real chance at that,” the partner replies.

As PYMNTS’ Karen Webster wrote last year, this was part of a pattern of people failing to ask tough questions about FTX and instead being impressed by SBF’s promises and intellect.

During a pitch to investors, partners at Sequoia seemed taken with the fact that Bankman-Fried was answering their questions while also playing a video game.

“A multitasking genius, he was called, a ‘10 out of 10,’” wrote Webster. “‘Goldilocks perfect’ is the term used to describe the regulatory posture that FTX was pursuing, with ‘no concerted effort to skirt the law.’”