[Exclusive] Threats of ED raids, arm-twisting and more: Why Sequoia Capital cut ties with Sandeep Kapoor's Algo Legal

Venture capital fund Sequoia Capital recently sent out a letter notifying a select group of its portfolio companies that it has stopped working with law firm Algo Legal, which was founded by former Sequoia General Counsel Sandeep Kapoor..Kapoor joined Sequoia Capital as General Counsel in 2010 and for 9 years was the head of its legal department till March 2019. Previously, he worked with Intel and Luthra & Luthra (later rebranded as L&L Partners)..Sequoia severed its ties with Algo Legal after an investigation into a portfolio company revealed, "concerning incidents" involving Kapoor’s firm and related parties.Sequoia has also cut ties with other entities linked to Kapoor, including Quant Legal Tech, Themis Associates and affiliated firms, and OneDelta Technology Solutions Private Limited..So what are these "concerning incidents" that have led to the controversy?.As per reliable sources, Kapoor threatened some of the Sequoia portfolio companies with cases for violations of the Foreign Exchange Management Act (FEMA) and investigations by the Income Tax Department, the Enforcement Directorate (ED) and other government agencies. Most of the start-up companies received routine Goods and Services Tax (GST) notices and had GST related litigation. These notices were allegedly interpreted to mean that there would be a threat of ED investigation or a raid on the startup..It was alleged that Kapoor, while taking advantage of his earlier position as Director Legal of Sequoia, was arm-twisting these portfolio companies to make them hire his firm (Algo Legal) or related entities for all legal work..It was alleged that Kapoor would ask for huge amounts of money to bail them out of these investigations..All of this came to light about six months ago, when some of these portfolio companies filed complaints with their investors (Sequoia and other PE Funds) after seeing a pattern..Algo Legal's Response.Bar & Bench reached out to Kapoor for his response to these allegations. While expressing his limited availability due to a family emergency, Kapoor replied:."Algo Legal is a law-abiding entity and has never conducted itself in contravention of any law(s). We refrain from being dragged into a trial by media and reserve our right to seek legal remedies as may be available to us to defend our reputation and seek justice.".As of June 4, Algo Legal has removed details of its Partners and Associates from its website..The firm also released this statement in response to the letter sent by Sequoia to its portfolio companies:.The entities that Sequoia has cut ties with are:.Quant LegaltechKapoor is the co-founder and Dhruv Nagarkatti, who is COO of Algo Legal, is the CEO of Quant LegalTech. Muraleedharan Nair is the other Director at Quant..OneDelta Technology Solutions Private LimitedThe parent company of OneDelta is based in Singapore, and Nair is one of the Directors in the Indian company.Themis Associates/Themis Law FirmThe relationship between Themis and Algo Legal is unclear at the moment. Whether Algo Legal fully absorbed Themis or merged with it or had any relationship prior to the formation of Algo Legal, is also unclear. Themis and Algo Legal advised Sequoia on most of its fundraising and exits between 2017 and 2020..Themis - Algo Legal - Sequoia.Kapoor established Algo Legal in August 2019. Themis had advised on most of Sequoia's prominent deals till then, including Vini Cosmetics, HealthKart, Bira, Bounce, Byju, Quickride, Zomato, Pocket Aces, Shuttl, and many more..Only after Kapoor's exit in 2019 did Sequoia engage a variety of law firms such as Rajaram Legal, IndusLaw, Luthra & Luthra and Cyril Amarchand Mangaldas..Till June 2021, Algo Legal has also been consistently advising Sequoia on its investments in Plum Benefits and other companies. .Sequoia's Legal team Director Ashwani Kumar used to work as a Partner at Themis before joining Sequoia in 2016.There are unanswered questions about Sequoia's role in engaging Themis / Algo Legal over the last 10 years. The Fund extensively engaged them to complete transactions worth more than a billion dollars in total before suddenly issuing a warning letter to its portfolio companies to desist from engaging with someone who headed the Fund's legal department for almost 10 years..Bar & Bench reached out to Sequoia's current General Counsel Siddharth Rao, who refused to comment..Investigation Begins: Enter AZB & Partners.One of the Bangalore based portfolio companies who was approached by Algo Legal for settling issues with the Government agencies approached Sequoia and complained about the approach of the law firm. .Sequoia then moved to AZB & Partners to probe this issue. To this end, it has asked all its portfolio companies to reach out to AZB & Partners if they have been dealing with Algo Legal and its related entities..The team at AZB handling this fiasco includes Managing Partner Zia Mody along with Partners Gautam Saha and Sachin Mehta..The portfolio companies of Sequoia declined to comment on the developments.