The crypto exchange FTX, which is currently going through bankruptcy proceedings, has taken legal action against its former CEO, Sam Bankman-Fried, and other individuals involved in the acquisition of the stock trading platform Embed. The FTX aims to recover hundreds of millions of dollars to repay its creditors and customers, as stated in court documents filed on May 18 in the US Bankruptcy Court in Wilmington, Delaware.
The lawsuit alleges that former FTX executives failed to conduct sufficient due diligence before paying an excessively high amount of $240 million for Embed, a business that is now valued at no more than $1 million. The acquisition, which had the highest bid in bankruptcy proceedings, is being challenged as an exorbitant overpayment.
Simultaneously, another lawsuit emerged, targeting Embed CEO Michael Giles and its shareholders. This legal action accuses the FTX of excessively spending $220 million on the stock-trading platform, a price that is considered significantly inflated. According to court filings, Embed’s chief technology officer, Laurence Beal, expressed surprise at the price paid by the FTX, given the lack of substantial due diligence performed by FTX executives. Beal described FTX’s evaluation process as reckless and haphazard, using a cowboy emoji in correspondence with a senior colleague at Embed.
As part of the acquisition, the FTX provided generous retention bonuses totaling $70 million to Embed employees. Shockingly, the majority of the $55 million went to Giles, the CEO of Embed, who later struggled to justify the staggering sum of his colleagues. The gravity of the situation becomes evident when analyzing Giles’ compensation package, which included a daily payment of $490,000 between the signing of the acquisition agreement on June 10, 2022, and the deal’s closure on September 30, 2022, assuming he worked every day of the week. Additionally, he received an extra windfall of $103 million when the acquisition was finalized, thanks to his significant stake as Embed’s largest shareholder. These figures are significantly higher than Giles’ regular monthly salary of $12,500 as Embed’s CEO.
Interestingly, while Giles received his full retention bonus on the closing date, other Embed employees were required to remain with the company for two years to receive their complete bonuses, further exacerbating this disparity.
FTX is now determined to recover a substantial sum of $236.8 million from Giles, Embed executives, and an additional $6.9 million from smaller shareholders of Embed, citing the disproportionate payouts made to insiders. FTX lawyers have also accused insiders of exploiting the exchange’s lack of control and recordkeeping, alleging significant fraud in misusing funds for Embed acquisition. These individuals were allegedly fully aware of FTX’s insolvency at the time the deal was finalized.
The FTX filed for Chapter 11 bankruptcy protection on November 11, 2022. Under the new leadership led by the bankruptcy attorney John Ray III, the focus has been on reclaiming funds to repay the exchange’s customers and creditors. Recent developments indicate that the FTX’s legal team considers relaunching exchanges in the future.
According to reports on May 12, court filings revealed that the U.S. The Department of Treasury and Internal Revenue Service (IRS) have accused FTX and its bankrupt subsidiaries of approximately $44 billion in unpaid partnerships and payroll taxes to the government.
In another development, on May 8, FTX founder Bankman-Fried filed court documents seeking the dismissal of 10 of the 13 charges against him. The charges he aims to dismiss include wire fraud, conspiracy to commit bank fraud, bribery, and campaign finance. Bankman-Fried has pleaded not guilty to all charges and is currently out of bail. This year, his trial was scheduled to occur in October.