FTX, a bankrupt crypto exchange, is aiming to reclaim more than $240 million it paid for the acquisition of stock trading platform Embed. This is to tackle FTX Bankruptcy.
The exchange alleges that former FTX insiders, including founder Sam Bankman-Fried, Embed executives such as founder Michael Giles, and Embed shareholders did not conduct proper due diligence before purchasing the flawed software platform.
FTX has filed three lawsuits in U.S. Bankruptcy Court in Delaware. It is against these individuals, accusing them of misappropriating company funds for acquiring stakes in Embed.
Embed acquisition and FTX’s management to recover assets
The acquisition of Embed took place only six weeks before FTX faced bankruptcy. This resulted in significant losses of customer funds. FTX’s current CEO, John Ray, referred to the actions as “old-fashioned embezzlement.”
Following the bankruptcy filing, FTX’s new management has been actively working to recover assets to repay customers. According to U.S. law, debtors can retrieve payments made shortly before a bankruptcy filing under certain circumstances. They can utilise the funds for the repayment of other creditors.
FTX recently attempted to sell Embed but received a meagre $1 million bid. This came from Michael Giles, the founder of Embed.
FTX claims that this auction strongly indicates that the $220 million spent on acquiring Embed was significantly inflated compared to the fair value of the company. Giles was well aware of this fact.
Approach to due diligence – mitigating FTX Bankruptcy with comprehensive integration
FTX intended to integrate Embed’s software into its crypto exchange platform to enable stock trading. However, the lawsuits argue that the software provided by Embed was essentially worthless.
FTX allegedly conducted minimal investigation into Embed and prioritised speed over comprehensive due diligence. Internal messages from Embed insiders expressed surprise at the high acquisition price given the limited interaction with Michael Giles, using a cowboy emoji to describe FTX’s approach to due diligence.
As part of the acquisition, FTX also disbursed $70 million in retention bonuses to Embed employees, with a substantial portion allocated to Michael Giles.
The lawsuits reveal concerns expressed by Giles regarding how to justify his $55 million bonus to other shareholders of Embed. FTX is now seeking to recover $236.8 million from Michael Giles and other insiders associated with Embed, along with an additional $6.9 million from minority shareholders of Embed.