FTX seeks to reclaim over $240m in controversial acquisition of Embed

Crypto exchange FTX, currently undergoing bankruptcy proceedings, has taken legal action against its former CEO, Sam Bankman-Fried, and other individuals involved in acquiring the stock trading platform Embed.

FTX aims to reclaim hundreds of millions of dollars to repay its creditors and customers, according to court documents filed on May 18 in the US Bankruptcy Court in Wilmington, Delaware.

The lawsuit alleges that former FTX executives conducted inadequate due diligence before paying an “astronomical” sum of $240 million for Embed, a business now valued at no more than $1 million. The acquisition, which fetched the highest bid in bankruptcy proceedings, is being challenged as an exorbitant overpayment.

Simultaneously, another lawsuit has emerged, targeting Embed CEO Michael Giles and its shareholders. This legal volley accuses FTX of lavishing an eye-popping $220 million on the stock-trading platform, a price that is deemed wildly inflated.

The lawsuit filed against Embed insider and CEO Michael Giles. | Source: Kroll

According to the court filing, Embed’s chief technology officer, Laurence Beal, expressed astonishment at the price paid by FTX, considering the lack of substantial due diligence conducted by FTX executives.

In a correspondence with a senior colleague at Embed, Beal described FTX’s evaluation process with a cowboy emoji, implying a reckless and haphazard approach to making financial decisions.

As part of the acquisition, FTX generously dished out $70 million in retention bonuses to Embed employees to fuel the fire. Shockingly, the lion’s share of $55 million went to Giles, the CEO of Embed, who later found himself struggling to justify the staggering sum to his fellow colleagues.

The gravity of the situation becomes apparent when analyzing Giles’ compensation package. Between the signing of the acquisition agreement on June 10, 2022, and the deal’s closure on September 30, 2022, Giles received an outstanding daily payment of $490,000, assuming he worked every day of the week. 

Furthermore, when the acquisition was finalized, he walked away with an additional windfall of $103 million, owing to his significant stake as Embed’s largest shareholder.

These exorbitant figures starkly contrast to Giles’ regular monthly salary of $12,500 as Embed’s CEO.

Curiously, while Giles received his complete retention bonus on the closing date, other Embed employees were compelled to remain with the company for two years to access their total bonuses, further deepening the disparity.

FTX’s to clawback over $240m from insiders

FTX is now fiercely determined to claw back a massive sum of $236.8 million from Giles, Embed executives, and an additional $6.9 million from the smaller shareholders of Embed, citing the disproportionate payouts made to insiders.

Furthermore, FTX’s lawyers have accused insiders of exploiting the exchange’s lack of controls and recordkeeping, alleging massive fraud in misusing funds to facilitate the Embed acquisition. These individuals were purportedly fully aware of FTX’s insolvency when the deal was finalized.

FTX filed for Chapter 11 bankruptcy protection on Nov. 11, 2022. Under new leadership, led by bankruptcy attorney John Ray III, the focus has been on reclaiming funds to repay the exchange’s customers and creditors.

Recent developments indicate that FTX’s legal team is considering relaunching the exchange in the future.


FTX’s legal battles

According to reports on May 12, court filings have revealed that the U.S. Department of Treasury and Internal Revenue Service (IRS) have accused FTX and its bankrupt subsidiaries of owing approximately $44 billion in unpaid partnership and payroll taxes to the government.

In another development, on May 8, the founder of FTX, Bankman-Fried, filed court documents seeking the dismissal of 10 of the 13 charges against him. The charges he aims to have dismissed include wire fraud, conspiracy to commit bank fraud, bribery, and campaign finance-related charges.

Bankman-Fried has pleaded not guilty for all charges and is currently free on bail. His trial is scheduled to take place in October later this year.

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