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FTX, FTX.US, and Alameda Research have taken legal action against former executives Sam Bankman-Fried (SBF), Nishad Singh, and Gary Wang for misusing FTX Group’s assets in acquiring Embed Financial Technologies. This marks the first formal move by FTX CEO John Ray against the company’s former management. The three entities have filed a lawsuit in the United States Bankruptcy Court for the District of Delaware, seeking to recover the funds spent during the acquisition.
FTX Sues SBF and His Inner Circle
The lawsuit alleges that the former management of FTX Group exploited the company’s lack of controls and recordkeeping to inflate the valuation of Embed and deliberately purchased the platform for more than it was worth. FTX Insiders performed minimal due diligence on Embed, prioritizing speed over everything else. They accepted all the terms proposed by Michael Giles, Embed’s founder and CEO and the sole representative, during the negotiations.
Michael Giles walked away from the deal with nearly $157 million and a retention bonus as an incentive to seal the deal quickly. The acquisition negotiations between Embed and FTX began in March 2022, and the parties signed a Memorandum of Terms a month later. This agreement attributed a $220 million enterprise value to Embed and a $75 million retention bonus, of which $55 million went to Giles.
However, when the deal was finalised in September, a few weeks before FTX Group went bankrupt, the FTX Insiders spent over $248 million to acquire Embed. The lawsuit alleges that while the acquisition took about six months, the essential terms were negotiated and agreed upon within two weeks.
FTX Seeks to Recover $250M
In addition, the lawsuit alleges that SBF, Singh, and Wang caused the company to issue Simple Agreements for Future Equity (SAFEs). These SAFE agreements could be converted into common stock in the event of a Chapter 11 bankruptcy filing. Ray, through his attorneys, is seeking to revoke the SAFEs and recover the funds spent during the Embed acquisition. The plaintiffs are also requesting the court to require the defendants to bear the legal costs of the lawsuit.
Additionally, the plaintiffs have filed an adversary lawsuit against Michael Giles, Embed’s staff, and former equity holders, including major Silicon Valley venture capital firms like Y Combinator, Bain Capital Ventures, and 9Yards.
