FTX pursues $244M clawback from ‘wildly inflated’ Embed acquisition deal

May 19, 2023 Coin Telegraph

<div>FTX pursues 4M clawback from 'wildly inflated' Embed acquisition deal</div>

FTX lawyers want to claw back $243.7 million from Embed insiders and executives, claiming its former leadership paid a "wildly inflated" price for the company.

FTX’s leadership is looking to claw back more than $240 million from insiders and executives that benefited from FTX's "wildly inflated" acquisition of stock-clearing platform Embed in September.

Cointelegraph reported yesterday that a lawsuit was filed against former FTX CEO Sam Bankman-Fried and other top FTX insiders on May 17 concerning the Embed acquisition, which they allege was conducted without enough due diligence.

However, on the same day, a separate lawsuit was filed seeking to claw back funds from Embed’s CEO Michael Giles and its shareholders, accusing FTX of paying a “wildly inflated” price of $220 million for the stock-trading platform.

Lawsuit filed against Embed insider and CEO Michael Giles. Source: Kroll.

According to the filing, Embed’s own Chief Technology Officer Laurence Beal was stunned that FTX paid so much for the company after one short meeting with Giles. In correspondence with another senior employee at Embed, Beal described FTX's due diligence process with a cowboy emoji.

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

As part of the purchase, FTX also paid Embed employees a total of $70 million in retention bonuses. The majority of that sum — $55 million — was paid to Giles, who later became concerned about how he would justify this amount to other employees.

Between the day that Giles signed the acquisition agreement on June 10, 2022, and the closing of the acquisition on September 30, 2022, he was being paid a staggering $490,000 each day, assuming that he worked seven days every week. He was also awarded an additional $103 million when the deal closed, due to his standing as Embed’s largest shareholder.

Back at you @Brett_FTX @SBF_FTX @ramnikarora and team. Excited for @Embedded to join @FTX_Official https://t.co/LttYxEFR7L
— Michael Giles (@Harland) June 21, 2022

This amount stands in stark contrast to Giles’ normal salary of $12,500 per month as Embed’s CEO.

Despite a number of Embed employees being awarded retention payment agreements, Giles was the only one who was paid his full retention bonus on the closing date. The other employees were obligated to remain at Embed for two years if they wished to receive their full bonuses.

As a result of these disproportionate payouts to Embed insiders, FTX will now seek to claw back $236.8 million from Giles and Embed executives as well as an additional $6.9 million from Embed’s smaller shareholders.

Additionally, lawyers accused FTX insiders of taking “advantage of the FTX Group’s lack of controls and recordkeeping to perpetrate a massive fraud” by using misallocated funds to facilitate the purchase of Embed, while being fully aware that the company was insolvent when finalizing the deal.

FTX filed for Chapter 11 bankruptcy protection on Nov. 11, 2022. The firms’ new leadership — headed by bankruptcy attorney John Ray III — has been focused on clawing back funds to repay customers and creditors. More recently, FTX lawyers considered a possible reboot of the exchange.

Cointelegraph contacted Embed CEO Michael Giles for comment did not receive a response by time of publication.

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FTX leadership sues Sam Bankman-Fried over $220M deal made prior to bankruptcy

May 18, 2023 Coin Telegraph

FTX leadership sues Sam Bankman-Fried over 0M deal made prior to bankruptcy

Alameda

When FTX tried to sell the platform after filing for bankruptcy, the top bid was for just $1 million, representing a 99.5% decline in value.

FTX lawyers are suing former CEO Sam Bankman-Fried, co-founder Zixiao Wang, and former senior executive Nishad Singh over the $220 million acquisition of stock-clearing platform Embed, alleging lack of due diligence.

According to a May 17 filing, FTX had paid $220 million to acquire Embed through its United States subsidiary after having allegedly “performed almost no due diligence” on the platform.

After FTX filed for bankruptcy, the judge in charge of the proceedings approved the sales of Embed and other assets of FTX, but the top bidder for the platform offered just $1 million, with FTX’s lawyers stating:

“The bidders had figured out what the FTX Group and FTX Insiders did not bother to assess prior to the Embed acquisition, namely, that Embed’s vaunted software platform was essentially worthless.”

While 12 entities had submitted non-binding indications of interest — the largest of which was $78 million — all but one declined to submit a final bid after conducting more comprehensive due diligence: Embed’s founder and former CEO, Michael Giles.

According to FTX’s lawyers, Giles had “personally received approximately $157 million in connection with the acquisition,” but his final bid to regain ownership of Embed was a paltry $1 million, subject to reductions at closing.

The lawyers additionally accused the FTX insiders of taking “advantage of the FTX Group’s lack of controls and recordkeeping to perpetrate a massive fraud” by using misappropriated customer funds to facilitate the purchase of Embed, while fully aware that the company was insolvent when finalizing the deal.

The lawyers further alleged that misleading records were created to obscure Alameda Research’s role in funding the Embed acquisition, claiming funds had been transferred between FTX entities, not from Bankman-Fried, Singh and Wang as claimed.

*A screenshot from the filing shows a visualization of the flow of funds according to FTX lawyers. Source: Kroll*

FTX wants the transactions to be labeled as “avoidable fraudulent transfers and obligations, and/or preferences,” in addition to having claims made by the defendants disallowed until FTX can recoup the funds lost through avoidable transfers.

FTX filed for bankruptcy on November 11, 2022, and since then, its new leadership has been focused on clawing back funds to repay customers and creditors. It has also been considering a possible relaunch of the exchange.

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FTX units on auction block draws 117 interested buyers: Court filing

January 10, 2023 Coin Telegraph

Bankruptcy

Four businesses up for sale as part of bankruptcy proceedings include Embed, LedgerX, FTX Japan and FTX Europe.

As many as 117 parties have expressed interest in buying up one or more of FTX’s independently operated subsidiaries including FTX Japan, FTX Europe, LedgerX and Embed.

In a Jan. 8 court filing made by Kevin Cofsky, a partner at Perella Weinberg, the investment bank representing FTX US and affiliated firms. Cofsky stated:

“Approximately 117 parties, including various financial and strategic counterparties globally, have expressed interest to the Debtors in a potential purchase of one or more of the Businesses.”

He added that the debtors have entered into 59 confidentiality agreements with potential counterparties who have expressed interest in any one or more of the companies.

While no firm agreements have been made, they can access information to facilitate due diligence, such as details regarding the business unit’s operations, finances, and technology.

Four businesses up for sale include Embed, LedgerX, FTX Japan, and FTX Europe, according to lawyers representing FTX debtors.

Around 50 parties were interested in Embed, 56 were looking at LedgerX, 41 expressed interest in FTX Japan, and 40 were for FTX Europe, according to the filing.

Embed is a clearing firm that FTX acquired in June 2022 to enhance its stock and equities offerings. LedgerX is Commodity Futures Trading Commission (CFTC) regulated digital currency futures and options exchange and clearinghouse acquired by FTX in August 2021.

FTX Japan and FTX Europe are independent subsidiaries of FTX global but were subject to license and business suspensions in December.

In December, FTX sought permission from a U.S. bankruptcy court to sell off the firm's Japanese and European branches, in addition to the two clearing companies.

The deadline for submitting initial bids for the four firms is set to expire between Jan. 18 and Feb. 1.

FTX wants permission to sell FTX Japan and FTX Europe as well as LedgerX

December 16, 2022 Coin Telegraph

Behnam

The four businesses FTX wants to sell had only recently been acquired, and lawyers argue this simplifies the sale process.

On Dec. 15 lawyers representing FTX filed a motion with the United States Bankruptcy Court seeking permission to sell off the firm's Japanese and European branches, derivatives exchange LedgerX and stock-clearing platform Embed.

The lawyers note that each of these businesses have been under pressure from regulators, which “merit[s] an expeditious sale process,” adding:

“The longer operations are suspended, the greater the risk to the value of the assets and the risk of a permanent revocation of licenses.”

FTX Japan is currently subject to a business suspension and improvement orders, while FTX Europe has had its licenses and operations suspended.

They also point to the loss of customers and employees the businesses have experienced since FTX filed for bankruptcy on Nov. 11, and believe selling these businesses now would allow the resumption of operations and therefore maximize value to the FTX estate.

The lawyers said these businesses were recently acquired and have been operating relatively independently of FTX, which would make a potential sale process much less complex.

Assuming there is more than one potential bidder the auctions for the businesses would start with Embed on Feb. 21 2023, with the other three occurring the following month.

Proposed auction dates for the four businesses. Source: CourtListener

More than 110 parties are said to be interested in purchasing one or more of the 134 companies included in the bankruptcy proceedings, and FTX has already entered into 26 confidentiality agreements with counterparties interested in the businesses or assets of FTX.

LedgerX in particular has been hailed as a success story during the bankruptcy proceedings of FTX, with Commodity Futures Trading Commission Chairman Rostin Behnam noting that the firm had essentially been “walled off” from other companies within FTX Group, and “held more cash than all the other FTX debtor entities combined.”

FTX wants to sell off parts of its failed crypto empire before they lose too much of their value or have their licenses permanently revoked, arguing it is in the best interests of all stakeholders.

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