Although it’s been almost eight months, the collapse of the crypto exchange FTX continues to leave behind drama in its wake. The latest by-product is how some of the largest VC firms have been recently pulled into the mess. 

According to a recently filed class-action lawsuit filed in the United States District Court for the Northern District of California, 18 VC firms have been named as defendants for allegedly aiding and abetting FTX’s fraud.

Inadvertently Helping FTX To Steal Customer’s Funds

FTX was once one of the largest crypto exchanges in the world, but it collapsed in a spectacular fashion that sent ripples across the whole industry. Specifically, it appeared that the company’s management mismanaged and moved up to $10 billion in customer funds to Alameda, which was using the exchange’s native token, FTT, as collateral.

Venture capital firms who had investments in the now-defunct exchange are now being taken to court. According to the lawsuit, Temasek, Sequoia Capital, Sino Global, Softbank, and 14 other VC firms allegedly actively aided and abetted FTX’s fraud. The lawsuit mentions that these VC firms failed to do due diligence before pouring hundreds of millions of investor funds into the company. 

The VC firms “perpetrated, conspired to perpetrate, and/or aided and abetted the FTX Group’s multi-billion-dollar frauds for their own financial and professional gain,” the lawsuit reads.

Lack Of Due Diligence By The Venture Capital Firms

The latest lawsuit reveals the eagerness and FOMO of VC firms to invest in FTX during the bull run of the crypto industry, ignoring obvious red flags. Some of these VC firms involved have taken accountability and admitted their lack of due diligence. 

One of those is the Singapore state fund Temasek, which cut the compensation pay of staff responsible for its investment in FTX. Temasek had earlier claimed that it had investigated FTX’s finances, audits, and regulatory checks over a period of eight months and found irregularities in the exchange. The firm had invested $210m and another $65m in the exchange in two funding rounds, all of which it has had to write off.

Softbank, a Japanese VC firm named as a defendant in the lawsuit, also marked down its $100 million investment into the exchange. Sino Global Capital, another firm named as a defendant, recently filed a lawsuit against FTX in a claim of $67 million. 

In a recent tweet, the company clarified that bankruptcy proceedings are related to FTX’s stake in the SGC fund. The exchange’s estate is currently selling its limited partner (LP) stakes in SGC at auction in hopes of raising money.