A new class action lawsuit has accused 18 industry-leading venture capital firms for assisting the FTX “crypto empire”, alleging that without them “the largest financial fraud in U.S. history would not have occurred”.
Softbank, Temasek and Sequoia Capital were some of those accused of using their status and power to perpetrate FTX’s “multibillion dollar global fraud”.
The lawsuit, filed on 7 August in Miami, said the investment companies aided and abetted FTX’s schemes “for their own financial and professional gain”.
“Those Defendants wielded their power, control, and deep pockets, to launch FTX’s house of cards to its multi-billion dollar scale,” the lawsuit said.
At the time of writing, the defending VC firms are yet to respond to these allegations and file any counter arguments. But Temasek previously said that FTX’s fraudulent behaviour was hidden from its investors, including itself.
The class-action lawsuit against FTX investors
While FTX stole customers’ money and broke numerous securities laws, the lawsuit alleged that the venture capital firms upheld a deceitful picture of the cryptocurrency exchange.
It said: “Each Multinational VC Defendant knew or was reckless in not knowing that SBF’s entire crypto empire was a sham.”
The court document added that the companies had “ample access” to private company information acquired during their due diligence of FTX. This information was claimed to be “in connection with the investments of hundreds of millions of dollars from the FTX Group into some of the Multinational VC Defendants’ own funds or partnerships”.
There was clear motivation from the defendants as they would have “reaped massive windfalls” if it weren’t for FTX’s bankruptcy, according to the lawsuit.
The class action is now seeking to recover the equivalent value of its plaintiffs assets, which are missing or inaccessible as a result of the FTX collapse.
Temasek’s response to the FTX fallout
Temasek, the investment company owned by Singapore’s government, was noted in detail for its role in obscuring FTX’s fraud.
The firm reported that it conducted eight months of due diligence, looking at the exchange’s business model, anti-money laundering policies, and know your customer checks. In its background research, it also enquired about the “preferential treatment” between FTX and CEO Sam Bankman-Fried’s hedge fund Alameda.
“From employing in-depth diligence standard in the industry, the Multinational VC Defendants knew that SBF was misappropriating Class Member funds,” the lawsuit said.
Temasek was one of the first firms to invest in FTX and funded the exchange with $275 millions. Following FTX’s demise, Temasek wrote off the exchange and laid off the employees responsible for the investment.
In a statement earlier this year, Temasek said: “There was fraudulent conduct intentionally hidden from investors, including Temasek.”
“Although there was no misconduct by the investment team in reaching their investment recommendation, the investment team and senior management, who are ultimately responsible for investment decisions made, took collective accountability and had their compensation reduced,” it added.
The lawsuit said its plaintiffs lost billions of dollars due to Bankman-Fried and the FTX exchange, which caused them “substantial harm”.
FTX stole billions of dollars worth of customer deposits “to support the operations and investments of FTX and Alameda, to fund speculative venture investments, to make charitable and political contributions, and to personally enrich SBF himself”.
Meanwhile, it sold unregistered securities that did not provide the plaintiffs with the relevant disclosures.
The lawsuit said that the venture capital firms “directly perpetrated, conspired to perpetrate, and/or aided and abetted the FTX Group’s multi-billion-dollar frauds”.