Private Equity Firms

Sequoia Capital, Paradigm among VCs facing ‘tricky’ FTX investor lawsuit

It’s a “tricky case,” as it is unknown what obligation these firms had to “completely separate investors,” suggests a crypto lawyer.

Users of bankrupt crypto exchange FTX have reportedly taken aim at financiers who promoted the platform, suggesting their efforts added an “air of legitimacy” to the now-defunct exchange in a case labeled as “tricky” by a crypto lawyer.

A Feb. 15 Bloomberg report revealed a class-action suit filed Feb. 14 by FTX investors against venture capital firm Sequoia Capital and private equity firms Thoma Bravo and Paradigm.

The investors accused the firms of touting “their own investments” of hundreds of millions of dollars in FTX.

It was alleged the firms were involved in a promotional marketing campaign in 2021, which the investors alleged added an “air of legitimacy” to the disgraced crypto exchange.

The three firms were all investors in FTX’s $900 million Series B round in July 2021, the largest raise in crypto history, in which various partners of the firms spoke highly of former FTX CEO Sam Bankman-Fried.

In a statement following the funding announcement in July 2021, Paradigm’s co-founder Matt Huang called Bankman-Fried a “special” founder who is “stunningly ambitious.”

Speaking to Cointelegraph, crypto lawyer Liam Hennessy, partner at Australian law firm Gadens, stated that it is a “tricky case,” and he questions “what obligation Sequoia and others” have to “completely separate investors.”

He added that despite the fact Sequoia’s due diligence wasn’t great, it doesn’t make it “liable to others.”

Hennessy believed it could be a case of “buyer beware,” as there is no suggestion that Sequoia wasn’t “playing within the regulatory rules.”

Cointelegraph contacted Sequoia Capital, Thoma Bravo and Paradigm for comment but did not receive an immediate response.

A separate Feb. 15 Bloomberg report revealed that in the same court filing, Sam Bankman-Fried and his father, along with former FTX and Alameda Research executives Caroline Ellison, Nishad Singh and Gary Wang, were all issued with a subpoena — an order for a person to attend court — to provide further evidence.

It was stated that Joseph Bankman, Ellison, Wang and Singh are due to attend court on Feb. 16, while Sam Bankman-Fried is expected to attend on Feb. 17.

SEC to target crypto firms operating as ‘qualified custodians’ — Report

If a majority of the five-member SEC panel votes in favor of the draft proposal, it will proceed to the next stage, which will be reviewed by other members of the SEC.

The United States Securities and Exchange Commission (SEC) is reportedly planning to propose new rule changes this week that could impact what services crypto firms can offer their clients.

According to a Feb. 14 report from Bloomberg citing “people familiar with the matter,” the securities regulator is working on a draft proposal that would make it difficult for crypto firms to hold digital assets on their client’s behalf as “qualified custodians.”

This may, in turn, affect the many hedge funds, private equity firms and pension funds that work alongside such crypto firms.

According to those cited, a five-member SEC panel will vote on Feb. 15 on whether the proposal proceeds to the next stage.

A majority vote — three out of five — will be needed for the rest of the SEC to vote on the proposal officially. If approved, the proposal will be amended with feedback where necessary.

Yesterday, our Division of Examinations announced its 2023 examination priorities.

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— Gary Gensler (@GaryGensler) February 8, 2023

While the SEC has deliberated on what should be required to be a qualified custodian of cryptocurrencies since March 2019, people familiar with the matter said it isn’t clear what specific changes the U.S. financial watchdog is seeking.

If finalized, Bloomberg explained that some crypto firms might have to move their customer’s digital asset holdings elsewhere.

The report added that these financial institutions might be subject to “surprise audits” related to their custodial relationships or other ramifications.

The news of Wednesday’s vote proposal comes after a Jan. 26 report from Reuters suggesting the SEC would soon pursue Wall Street investment advisers over how they’ve offered crypto custody to their clients.

In recent days, the SEC has had its hands full with Paxos Trust — the issuer of the Binance USD (BUSD) stablecoin — which they believe in having issued as an unregistered security.

Paxos said they would be prepared to “vigorously litigate” if necessary.