Paradigm, Andreessen Horowitz, and Union Square Ventures sued over alleged ‘rampant fraud’ on Uniswap exchange

April 11, 2022, 3:45 PM UTC

The most successful crypto funds have taken a hands-on approach with the founders they work with. But when it comes to digital assets, that too easily coincides with a hands-on approach to liability.

Three venture capital investors have been named in a lawsuit lodged last week against crypto token exchange Uniswap and its founder due to, not only their ownership stake in the company, but also their alleged deep involvement in building out and developing Uniswap, which is a decentralized token exchange protocol built on Ethereum blockchain that was founded in 2018.

Nessa Risley, a North Carolina resident who claims to be a Uniswap customer, is accusing the exchange of being an unregistered exchange and brokerage and failing to address the “rampant fraud” occurring on its platform, according to the lawsuit, which was filed in a federal New York court last week. 

Three of Uniswap’s VC investors—Paradigm, Andreessen Horowitz, and Union Square Ventures—were allegedly “intimately involved” in developing and promoting the exchange, writing smart contracts, and overseeing operations, among other things, which makes them liable for what happens on the platform, the lawsuit asserts.

“These allegations are meritless and the complaint is riddled with factual inaccuracies. We plan to vigorously defend against this suit,” a Uniswap Labs spokesperson said in a statement. An Andreessen Horowitz spokesperson declined to comment, and representatives for Paradigm and Union Square Ventures didn’t respond.

Risley’s grievances stem from a series of schemes that the lawsuit alleges have repeatedly taken place on the Uniswap platform, such as “rug pulls,” where a new issuer will place a new token into a liquidity pool, then prematurely withdraws their coins, or “pump and dump schemes,” where issuers will send new tokens to themselves, loudly tout them on social media, then dump their holdings and leave with the profits.

Uniswap has acknowledged the problems, the lawsuit claims, but has allegedly avoided putting in the effort required to stop them due to it making fee revenue from every transaction.

Uniswap and its VCs “have and continue to turn a blind eye to the fraud and do nothing to stop it, because those in control of Uniswap profit handsomely from such conduct,” the lawsuit alleges.

With so much capital sloshing around, the venture capital model has evolved over the last two decades—as firms need to offer something beyond pure cash to get a founder’s attention. Firms like Andreessen Horowitz were early adopters and developers of this value-add model, hiring slews of support staff to work with their portfolio companies post-investment.

It shouldn’t be surprising that this comes with an extra layer of risk. But hey—that just comes with the territory. And it certainly doesn’t seem to be scaring anyone away. Limited partners are throwing billions of dollars at venture capitalists who will put their money to work in crypto. It’s unlikely a lawsuit will impede anyone’s plans.

Attendees take selfies with The Miami Bull during the Bitcoin 2022 Conference at Miami Beach Convention Center on April 7, 2022 in Miami, Florida.
Attendees take selfies with The Miami Bull during the Bitcoin 2022 Conference at Miami Beach Convention Center on April 7, 2022 in Miami, Florida.
Marco Bello—Getty Images

Keep your enemies close… It wouldn’t be a crypto event without a little bit of drama, and the Bitcoin 2022 Conference delivered just that. Last week, Miami Mayor Francis X. Suarez unveiled a 3,000 pound “Miami Bull” statue last week to showcase its efforts at becoming the epicenter of crypto and fintech. The bull is what the city describes as a “modern interpretation” of Wall Street’s Charging Bull in New York, complete with laser eyes. Later on, VC and Paypal founder Peter Thiel called out the “enemies” of Bitcoin in what appears to have been a rather heated keynote presentation. Apparently, Warren Buffet is “enemy No. 1” and a “sociopathic grandpa from Omaha.” Yikes.

The Saudi coffers… Just six months after he left the White House, former senior advisor and President Donald Trump’s son-in-law Jared Kushner received a $2 billion investment from Saudi Arabia’s primary sovereign wealth fund for his newly organized private equity firm, according to a new investigation from the New York Times. The investment was accepted despite a slew of concerns from the fund’s advisers. Kushner had defended Crown Prince Mohammed bin Salman within the Trump Administration after the murder of Washington Post columnist and Saudi royalty critic Jamal Khashoggi—raising questions as to whether the investment was payback for his support or a potential bid “for future favor” if Trump seeks re-election. “Affinity, like many other top investment firms, is proud to have PIF and other leading organizations that have careful screening criteria, as investors,” a spokesman representing Kushner told the Times in response. A Saudi fund spokesman declined to comment. You can read more here.

See you tomorrow,

Jessica Mathews
Twitter: @jessicakmathews
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