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Bankrupt cryptocurrency exchange FTX is suing to recover more than $240 million it spent on the stock trading platform Embed, claiming that former FTX insiders did not conduct due diligence before purchasing the practically useless, buggy software platform.
Late on Wednesday, FTX filed three cases in Delaware’s U.S. Bankruptcy Court against former FTX insiders, including the company’s indicted founder Sam Bankman-Fried, Embed executives Michael Giles, and Embed stockholders. Bankman-Fried and other FTX executives, according to FTX, stole money from the firm to buy interests in Embed as part of the deal.
FTX completed the acquisition of Embed just six weeks before the cryptocurrency exchange declared bankruptcy in November. The questionable investments made by FTX cost its customers billions of dollars, a practise that its current CEO John Ray referred to as “old-fashioned embezzlement.”
Since the bankruptcy filing, FTX’s new management has been working to recover assets to compensate customers. Under some conditions and before filing for bankruptcy, debtors are permitted by U.S. law to recoup payments paid and utilise those sums to pay off other creditors.
FTX recently tried to sell Embed, but the highest bidder was Giles, who offered only $1 million.
The $220 million FTX spent to purchase Embed was “wildly inflated relative to the company’s fair value, which Giles well knew,” according to the company’s lawsuit, which claims that the auction “leaves no doubt” about this.
FTX intended to use Embed’s software to add stock trading to its crypto exchange platform, but Embed’s software was “essentially worthless,” the lawsuits said. FTX performed almost no investigation of Embed and “prioritized speed over all else,” they added.
Insiders at Embed expressed amazement that FTX spent so much for the business after only meeting with Giles in internal messages, labelling FTX’s due diligence method with a cowboy emoji.
FTX also gave Embed workers $70 million in retention bonuses as part of the acquisition. According to the claims, Giles received the most of that, and he later expressed concern over how to explain his $55 million incentive to other Embed shareholders.
Giles and Embed executives are being pursued for $236.8 million in damages, as are Embed minority stockholders for $6.9 million.
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