Cryptocurrencies, blockchain, NFT and new trends

FTX lawyers sue Bankman-Fried over fintech they now say is ‘worthless’

Policy • May 17, 2023, 11:25PM EDT The Block

Quick Take

  • FTX’s current leadership claims that Bankman-Fried and other executives knew that Alameda Research was insolvent when it finalized a nearly $250 million deal to buy stock clearing platform Embed. 

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The team overseeing the bankruptcy of FTX, Alameda Research and the over 100 other companies affiliated with Sam Bankman-Fried’s failed business empire are suing the former FTX CEO, FTX co-founder Gary Wang, and former FTX senior executive Nishad Singh over what they say was a wildly overpriced acquisition just weeks before the exchange’s implosion.

In a suit filed in U.S. Bankruptcy Court for the District of Delaware on Wednesday, FTX’s current leadership claims that Bankman-Fried and other executives knew that Alameda Research, the investment fund also owned by Bankman-Fried, was insolvent when it finalized a nearly $250 million deal to buy stock clearing platform Embed. 

The lawsuit claims that Bankman-Fried and others knowingly used fraudulent funds taken from FTX customers for Alameda’s acquisition of the company. On top of targeting former FTX/Alameda leadership, separate suits also seek to claw back funds from Embed’s founder and former CEO Michael Giles, as well as early investors who sold their stakes to Bankman-Fried and company, including Propel Venture Partners, a venture capital firm that has backed several other notable tech startups, including Coinbase and Docusign. 

Unlike Bankman-Fried and others, Giles and Embed shareholders named in a parallel separate suit are not accused of criminal wrongdoing. 

Lawyers representing the failed FTX crypto empire want to claw back money on the grounds that Alameda was already insolvent when it finalized the deal in late September, and that the investment fund and sister company West Realm Shires, also controlled by Bankman-Fried, paid an inflated price for Embed. The suits are an attempt to maximize pay back to FTX and Alameda’s own creditors within the bankruptcy process. 

Allegedly terrible deal

Aside from allegations of fraud and self-dealing using customer funds – also alleged in criminal proceedings brought by U.S. prosecutors – FTX’s bankruptcy stewards also accuse Bankman-Fried and company of making a terrible deal. Lawyers representing FTX in the bankruptcy process put Embed up for bidding but now say that the platform is near-worthless compared to what Bankman-Fried and company paid for it. 

On June 27, after the acquisition was agreed to but had not been finalized, two senior employees noted in internal messages quoted in the filing that “Embed platform’s inability to handle approximately 600 new user accounts as part of the gradual release of FTX Stocks,” though a release plan called for Embed to handle 10,000 new accounts. 

The company had approximately $37 million in assets and made $25,000 profit as of March 31, 2022, the filing claims. 

On top of that the company gave Embed’s founder and CEO, named in a separate suit along with other equity holders who sold their stakes to Alameda, a $55 million retention bonus, to be paid in five installments beginning on Sept. 30, 2022, that did not require him to stay with the company past deal closing. 

‘Almost no due diligence’

“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. “As a consequence, WRS paid far more than fair or reasonably equivalent value for Embed, and awarded Giles an extravagant and unwarranted retention bonus as an incentive to complete the acquisition quickly.”

FTX’s bankruptcy representatives argue that the retention bonus was an “unusual arrangement” because it only tied Giles to Embed through the closing of the deal, rather than keeping him on to run the company afterwards. He also received over $100 million for his equity as Embed’s largest shareholder. 

In communications between Embed employees, included as part of the lawsuit filing, two of them note the speed that Alameda hoped to close the deal while talking about whether they needed to prep for any sort of due diligence around the purchase. 

“I get a sense that they are [cowboy emoji] over there[.],” replied one. 

‘Essentially worthless’

FTX’s lawyers say that after trying to sell the company only months after the acquisition of Embed, no one wants to buy it for anywhere near what Bankman-Fried and others paid for it.  

Giles himself submitted the highest bid during a process held earlier this year, seeking to buy back the company for $1 million “subject to potential reductions at closing.” 

Giles did not immediately respond to a request for comment. 

“The result of the bidding process—including Giles’ own bid of $1 million, or 0.45% of the purchase price that WRS had paid just a few months before—leaves no doubt that the $220 million paid by WRS to acquire Embed was wildly inflated relative to the company’s fair value, which Giles well knew,” lawyers representing FTX’s caretaker leadership argue in the suit. “The bidders had figured out what the FTX Group and FTXInsiders did not bother to assess prior to the Embed acquisition, namely, that Embed’s vaunted software platform was essentially worthless.”