In a recent turn of events, a class-action lawsuit has been filed against venture capital and private equity firms, including Sequoia Capital, Thoma Bravo, and Paradigm, for promoting the legitimacy of the collapsed cryptocurrency exchange FTX.
What the lawsuit claims the firms did with FTX
The suit alleges that these firms promoted the legitimacy of FTX and lent their reputations to the crypto exchange, adding an “air of legitimacy” that contributed to the company’s eventual collapse. The comp was valued at over $32 billion in 2021, making it briefly one of the most valuable startups in the country.
The lawsuit has accused these firms of misrepresentation, false advertising, and civil conspiracy, among other violations of state and federal law.
It also targets celebrities who endorsed the exchange, such as NFL quarterback Tom Brady, comedian Larry David, and supermodel Gisele Bündchen, among others. These celebrities were allegedly “responsible for the many billions of dollars in damages they caused” by promoting FTX.
Venture capital firms have come under fire for their investments in FTX, with Sequoia Capital attracting particular criticism. The prestigious firm backed Sam Bankman-Fried, even though he was reportedly playing video games during meetings with investors.
Sequoia also commissioned a 14,000-word profile on Bankman-Fried, which was widely mocked after the company’s collapse. Sequoia wrote down the full value of its $214 million investment in FTX shortly after the exchange fell into crisis.
The venture capital firms claimed to have conducted significant due diligence on the company’s operations and vouched that the platforms were secure.
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 Lawsuit
Celebrities sued because of FTX
Celebrities who endorsed FTX, including Tom Brady and Gisele Bündchen, are also facing lawsuits. The complaint argues that the celebrities, in lending their credibility to the failed cryptocurrency exchange, were “responsible for the many billions of dollars in damages they caused.”
The plaintiffs allege that these celebrities violated Florida securities and consumer-protection laws by failing to provide specific information on their financial arrangement with FTX, in addition to not undergoing requisite due diligence before promoting the company.
The lawsuit against FTX, its co-founder, and its celebrity endorsers highlights the importance of due diligence in investing and promoting cryptocurrency exchanges.
Like the complaint argues, engaging with the FTX platform involved buying and selling “unregistered securities,” regulated by the Securities Exchange Commission (SEC).
This means that endorsers were required to reveal the details of their financial agreements with the defunct company, and failing to do so could result in legal action.
The case serves as a cautionary tale for investors and celebrities alike. While the potential rewards of investing in cryptocurrency exchanges are high, so too are the risks.
Without proper due diligence, investments and endorsements can lead to significant losses and legal action. As the world of cryptocurrency continues to grow and evolve, investors and celebrities must be diligent in their research and transparent in their dealings to avoid similar lawsuits in the future.
