Column: Latest FTX lawsuit casts investors Sequoia, Thoma Bravo as co-conspirators

The logo of FTX is seen at the FTX Arena in Miami
The logo of FTX is seen at the entrance of the FTX Arena in Miami, Florida, U.S., November 12, 2022. REUTERS/Marco Bello/File Photo

Feb 15 (Reuters) - (The opinions expressed here are those of the author, a columnist for Reuters.)

Investment funds Sequoia Capital Operations LLC, Thoma Bravo LP and Paradigm Operations LP sunk $550 million into Sam Bankman-Fried’s FTX enterprises before the crypto exchange went bust last November. The funds are all now among the legions of creditors in the FTX Chapter 11 bankruptcy.

But according to a new proposed class action, Sequoia, Thoma Bravo and Paradigm were not victims of FTX’s alleged fraud.

Instead, according to the lawsuit filed by a former FTX customer, the three venture and private equity funds were in on FTX’s scheme, funding the platform's public relations blitz to reel in crypto customers so they could boost the value of their own early investments in Bankman-Fried’s entities.

If not for the credibility lent by these highly regarded investors, who celebrated FTX and Bankman-Fried as trustworthy outliers in an industry rife with scams, FTX’s valuation would not have skyrocketed from about $1.2 billion to $32 billion in the three years before its collapse, the complaint contends.

The proposed class action, filed in federal court in San Francisco, accuses the funds of violating California state securities, business practices and advertising laws and of engaging in a civil conspiracy to induce crypto customers to open accounts at FTX. (A judge will need to decide later whether to let the case proceed as a class action.)

None of the funds responded to requests for comment from me or from my Reuters colleague Jon Stempel. A spokesperson for Bankman-Fried declined to comment on the new case, which was filed by the prominent securities class action firm Robbins Geller Rudman & Dowd.

The lawsuit's legal theory seems to be at odds with the theory posited by the U.S. Securities and Exchange Commission in its December 2022 suit against Bankman-Fried. The SEC, as I reported at the time, alleged that FTX’s founder deceived the equity investors who bought FTX shares in a series of offerings between 2019 and 2022. It does not name those investors, but the description fits Sequoia, Thoma Bravo, and Paradigm among others.

The SEC, in other words, is contending that investors were not aware Bankman-Fried was orchestrating a colossal fraud. The newly filed private case, in contrast, argues that Sequoia, Thoma Bravo and Paradigm either knew Bankman-Fried was misusing customer money or should have known. (The SEC’s case against the FTX founder, as well as a parallel suit by the U.S. Commodity Futures Trading Commission (CFTC), were stayed this week until the conclusion of the U.S. Justice Department’s criminal case.)

Robbins Geller partners Shawn Williams and Stuart Davidson did not respond to my email query about the divergent theories offered by their lawsuit and the SEC case.

The would-be class action said at least one CFTC commissioner, Christy Goldsmith Romero, believes that Sequoia was aware FTX would promote the fund’s investment in the platform as a way to build trust and credibility with customers. In a speech last month that is cited in the new complaint, Romero said Sequoia “at least knew” 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 considerably further than the CFTC commissioner, detailing 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 principal Orlando Bravo similarly heaped praise on 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 the FTX-related trading firm Alameda Research for its own crypto-centric venture fund – then turned around and invested money from that venture fund in an FTX equity round. Paradigm was not quite as effusive about FTX as Sequoia and Thoma Bravo, according to the complaint, but praised FTX in at least two press releases.

All of the funds, the class action alleges, should have known FTX was not the safe haven they portrayed it to be. “If defendants performed the due diligence activities that they claimed to have performed with respect to FTX, they would have been apprised through such activities of the wanton fraud and self-dealing and the complete lack of internal controls and competency present at FTX,” the complaint said.

The new case is the first to target FTX equity investors as defendants. Previous suits, as I’ve told you, have focused on FTX executives, auditors, banks and celebrity “brand ambassadors” who promoted the exchange.

If you’re paying close attention to private litigation stemming from the FTX collapse, you’ll know that the venue Robbins Geller chose for the new class action is also important.

There’s a brewing fight among plaintiffs firms over where and even whether FTX customer suits should be consolidated in a single forum. Lawyers who are leading class actions against FTX celebrity endorsers in federal court in Miami, including Boies Schiller Flexner, asked a special panel of federal judges last week to transfer all private FTX-related suits to Florida, where they are well-positioned for appointment to lead the litigation.

But a rival group of firms has proposed consolidating several FTX customer cases before U.S. District Judge Jacqueline Scott Corley of San Francisco. Those firms have asked Scott Corley to approve a leadership structure that does not include the firms litigating in Miami.

Robbins Geller seems to have sided with the California crew. The cover sheet on the new class action indicated that the suit against Sequoia, Thoma Bravo and Paradigm is related to the FTX customer cases already before Scott Corley. Interestingly, three previous FTX customer suits seeking class-action status named Silvergate Bank as a defendant were just refiled in San Francisco federal court, after plaintiffs lawyers voluntarily dismissed their original Silvergate suits, which had been filed in San Diego federal court. (Silvergate did not respond to a query on the refiled cases.)

It looks, in other words, as if plaintiff lawyers, with the notable exception of the firms litigating in Miami, believe San Francisco is the best place to litigate private claims for FTX customers.

Read more:

FTX customers sue financiers for giving bankrupt crypto exchange an 'air of legitimacy'

Boies, co-counsel move to grab control of all private FTX cases

U.S. judge puts SEC, CFTC cases against FTX's Sam Bankman-Fried on hold

Reporting By Alison Frankel; Editing by Leigh Jones

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Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.

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Alison Frankel has covered high-stakes commercial litigation as a columnist for Reuters since 2011. A Dartmouth college graduate, she has worked as a journalist in New York covering the legal industry and the law for more than three decades. Before joining Reuters, she was a writer and editor at The American Lawyer. Frankel is the author of Double Eagle: The Epic Story of the World’s Most Valuable Coin.