In a rare move, American venture capital firm Sequoia Capital reportedly apologized to its fund investors for the $150 million it has lost on the now-bankrupt crypto exchange FTX.
The Wall Street Journal reported the apology, citing people familiar with the matter. Sequoia’s partners told the fund investors on a call on Tuesday that the firm would improve its due-diligence process when it comes to future investments.
A Sequoia partner, the sources said, stated that in the future,
“The firm will be in a position to have even early-stage startups’ financial statements audited by one of the Big Four accounting firms.”
The Big Four are the largest professional services networks in the world and include Deloitte, Ernst & Young (EY), Peat Marwick Goerdeler (KPMG), and PricewaterhouseCoopers (PwC).
Sequoia wrote off its entire investment in FTX earlier this month after the exchange struggled to fulfill requests for withdrawals. FTX filed for bankruptcy on November 11.
This investment was “one of the largest written by a venture firm in the company,” said the report. This happened after the firm “shirked traditional corporate controls such as external board oversight that are typical for such large investments.”
Sequoia partners claimed on the call that the firm conducted due diligence on FTX. However,
“[It] also believed it was misled by FTX based on its recent bankruptcy filing, the people said.”
Specifically, the company argued that it was misled by the FTX founder Sam Bankman-Fried on the exchange’s connections with its parent company Alameda Research.
It has since been revealed by Bankman-Fried that FTX loaned customer funds to Alameda, which then lost billions of dollars, leaving FTX with a funding gap of up to $8 billion.
The boards of directors are usually responsible for approving transactions with related parties – which, in this case, is Alameda. However, per the sources, Sequoia and other shareholders asked for a seat on FTX’s board of directors, but Bankman-Fried repeatedly told them that their ownership in the company was too small for that.
The Tuesday conference call was an unusual event for this company, people familiar with the matter said, as Sequoia rarely addresses its broader group of investors besides the routine update calls and in-person conferences.
The Wall Street Journal cited their sources and reported that,
“The swift decline of FTX has amplified a rare moment of discontent from Sequoia’s fund investors over some of its recent decisions.”
In a note to fund investors sent on November 9, Sequoia said that the fund that backed FTX had $7.5 billion worth of real and paper gains, as well as that the FTX investment accounted for less than 3% of the committed capital for the fund.
Meanwhile, the lawyer representing the new management of FTX, James Bromley, said in a bankruptcy hearing on Tuesday that a “substantial amount” of the exchange’s assets are either missing or have been stolen.
Bromley stated that,
“What we have here is a worldwide, international organization, but which was run as a personal fiefdom of Sam Bankman-Fried.”
He also previously said that FTX was controlled by “inexperienced and unsophisticated individuals” and that “some or all of them were compromised.”
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