In a recent twist of events, FTX lawyers have decided to sue 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.
Following FTX’s bankruptcy, the judge of proceedings approved the sales of Embed and other assets of FTX. However, the top bidder for the platform offered just $1 million, which led FTX’s lawyers to observe: “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.”
Interestingly, while 12 entities had submitted non-binding indications of interest with the largest valuation at $78 million, all but one declined to submit a final bid after conducting more comprehensive due diligence. The only remaining bidder was Embed’s founder and former CEO, Michael Giles.
FTX’s lawyers have alleged that Giles received approximately $157 million in connection with the acquisition. However, his final bid to regain ownership of Embed was a meager $1 million, subject to reductions at closing. They further 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. Also, they alleged the insiders were fully aware that the company was insolvent when finalizing the deal.
Moreover, the lawyers claim that misleading records were created to obscure Alameda’s role in funding the Embed acquisition. They believe that funds were transferred between FTX entities and did not come from Bankman-Fried, Singh, and Wang, as had previously been claimed.
FTX is now seeking to have the transactions labeled as “avoidable fraudulent transfers and obligations, and/or preferences” and wants to have claims made by the defendants disallowed until FTX can recoup the funds lost through avoidable transfers.
This case raises several questions about the role of proper due diligence in acquisition deals, especially in the crypto industry. With FTX’s filing for bankruptcy on November 11 and its new leadership
Source: Cointelegraph
