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The group in charge of managing the bankruptcy proceedings of FTX, along with Alameda Research and more than 100 other affiliated companies linked to Sam Bankman-Fried’s unsuccessful business empire, have filed a lawsuit against the former CEO of FTX, Gary Wang, co-founder of FTX, and former senior executive Nishad Singh. The lawsuit alleges that the defendants made an excessively expensive acquisition shortly before the collapse of the exchange.
FTX’s present management has lodged a lawsuit in the U.S. Bankruptcy Court for the District of Delaware, alleging that Bankman-Fried and other executives were aware of Alameda Research’s insolvency when they completed a deal worth around $250 million to acquire the stock clearing platform Embed.
According to the lawsuit, it is alleged that Bankman-Fried and other individuals deliberately utilized fraudulent funds obtained from FTX customers for Alameda’s purchase of the company. Additionally, apart from pursuing legal action against former FTX/Alameda executives, separate lawsuits aim to recover funds from Michael Giles, the founder and former CEO of Embed, as well as early investors who sold their shares to Bankman-Fried and his associates.
This includes Propel Venture Partners, a venture capital firm that has supported various prominent tech startups such as Coinbase and Docusign. In contrast to Bankman-Fried and the others, Giles and the shareholders of Embed, who are mentioned in a separate lawsuit, are not facing accusations of criminal misconduct.
Legal representatives representing the collapsed FTX cryptocurrency empire are seeking to recover funds based on the argument that Alameda was already insolvent when the deal was finalized in late September. They contend that Alameda, along with West Realm Shires, a sister company also under Bankman-Fried’s control, paid an inflated price for acquiring Embed. These lawsuits are an effort to optimize the repayment to the creditors of FTX and Alameda within the context of the bankruptcy proceedings.
FTX Deal Gone Wrong
In addition to the criminal charges brought by U.S. prosecutors, which include allegations of fraud and self-dealing using customer funds, FTX’s bankruptcy overseers are also accusing Bankman-Fried and his associates of engaging in a disastrous deal. Lawyers representing FTX in the bankruptcy proceedings had put Embed up for auction, but they now claim that the platform’s value is significantly lower compared to the price paid by Bankman-Fried and his associates.
Internal messages quoted in the filing reveal that on June 27, while the acquisition had been agreed upon but not yet finalized, two senior employees acknowledged the “Embed platform’s inability to handle approximately 600 new user accounts” as part of the gradual release of FTX Stocks. This discrepancy is noteworthy as the release plan had outlined Embed’s capacity to handle 10,000 new accounts.
According to the filing, the company’s assets amounted to approximately $37 million, and it generated a profit of $25,000 as of March 31, 2022.
In addition, the company provided a $55 million retention bonus to the founder and CEO of Embed, who is mentioned in a separate lawsuit along with other equity holders who sold their shares to Alameda. This bonus was structured to be paid in five installments starting from September 30, 2022, and it did not necessitate the founder’s continued involvement with the company beyond the completion of the deal.
“They performed almost no due diligence on Embed and accepted the significant terms proposed by Giles, Embed’s founder, CEO, and sole representative during the negotiation, who personally received approximately $157 million in connection with the acquisition,” FTX bankruptcy lawyers argue.
According to FTX’s lawyers, attempts to sell the company shortly after acquiring Embed have proven unsuccessful as there is no interest from potential buyers to acquire it at a price even remotely close to what Bankman-Fried and other parties initially paid for it.
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