Bankrupt cryptocurrency firms FTX, FTX.US, and Alameda Research have filed a lawsuit against their former executives, Sam Bankman-Fried (SBF), Nishad Singh, and Gary Wang. The lawsuit, filed in the United States Bankruptcy Court for the District of Delaware, seeks to recover the funds spent on the acquisition of stock clearing firm Embed Financial Technologies.
According to the court documents, the plaintiffs accused the former management of taking advantage of FTX Group’s lack of controls and recordkeeping to inflate the valuation of Embed and deliberately purchasing the platform for more than it was worth. The defendants, referred to as FTX Insiders, performed little to no due diligence on Embed as they prioritized speed above all else during the transaction.
The plaintiffs alleged that the FTX Insiders accepted all the terms proposed during the negotiation by Michael Giles, Embed’s founder and CEO, who was also the sole representative. Giles walked away from the deal with roughly $157 million and an “extravagant and unwarranted retention bonus” as an incentive to quickly complete the sale.
When the deal was finalized in September, a few weeks before FTX Group went bankrupt, the FTX Insiders spent more than $248 million to acquire Embed, despite the initial valuation being $220 million. The plaintiffs have accused the former management of deliberately purchasing the platform for more than it was worth.
The plaintiffs have also accused SBF, Singh, and Wang of causing the bankrupt entity to issue Simple Agreements for Future Equity (SAFEs), which could be converted into common stock in the event of a Chapter 11 bankruptcy filing. The plaintiffs are seeking to revoke the SAFEs and recover the funds spent during the acquisition of Embed.
Through his lawyers, current FTX CEO John Ray seeks to recover the funds spent during the acquisition of Embed and to revoke the SAFEs. The plaintiffs have also asked the court to order the defendants to bear the legal costs of the lawsuit.
Meanwhile, the plaintiffs also filed an adversary lawsuit against Giles, the employees, and former equity holders of Embed. Some former equity holders include Silicon Valley venture capital firms like Y Combinator, Bain Capital Ventures, and 9Yards.
The lawsuit filed by FTX, FTX.US, and Alameda Research against their former executives over the acquisition of Embed Financial Technologies highlights the importance of due diligence and proper controls and recordkeeping during mergers and acquisitions. The plaintiffs have accused the former management of deliberately inflating the valuation of Embed, causing the bankrupt entity to issue SAFEs and overspending on the acquisition. The outcome of the lawsuit will determine whether the plaintiffs can recover the funds spent during the acquisition and revoke the SAFEs.