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FTX Files Lawsuit Against Former Executives Over Lack of Due Diligence in $220 Million Embed Acquisition

FTX has filed a lawsuit against its former CEO Sam Bankman-Fried, co-founder Zixiao Wang, and former senior executive Nishad Singh. The legal action stems from FTX’s acquisition of the stock-clearing platform Embed for $220 million, which the company now alleges was done without adequate due diligence.

According to a filing on May 17, FTX claims that it performed minimal due diligence on Embed before acquiring the platform through its United States subsidiary. The acquisition took place prior to FTX filing for bankruptcy, and subsequently, the judge overseeing the proceedings approved the sale of Embed and other FTX assets. However, the top bidder for Embed offered a mere $1 million, leading FTX’s lawyers to assert that Embed’s software platform was essentially worthless.

Former CEO Sam Bankman-Fried, co-founder Zixiao Wang, and former senior executive Nishad Singh

The lawsuit revealed that out of the 12 entities initially interested in acquiring Embed, only one, its founder and former CEO Michael Giles, proceeded with comprehensive due diligence. However, Giles’ bid to regain ownership of Embed was a meager $1 million and subject to reductions at closing. FTX’s lawyers claim that Giles had already received approximately $157 million in connection with the acquisition, highlighting what they consider to be an alarming discrepancy.

FTX’s lawyers further allege that the company’s insiders exploited FTX Group’s lax controls and recordkeeping, perpetrating a significant fraud. They accuse Bankman-Fried, Singh, and Wang of using misappropriated customer funds to facilitate the purchase of Embed, fully aware of the platform’s insolvency.

The lawsuit also points to the creation of misleading records to conceal the involvement of Alameda, an affiliated company, in funding the Embed acquisition. FTX asserts that funds were transferred between FTX entities, contrary to the claims made by Bankman-Fried, Singh, and Wang.

In response to the situation, FTX is seeking to have the transactions labeled as “avoidable fraudulent transfers and obligations, and/or preferences.” Additionally, FTX aims to disallow the defendants’ claims until the company can recoup the funds lost through these questionable transfers.

The outcome of this lawsuit could have significant implications for FTX and its former executives, as well as shedding light on the due diligence practices within the cryptocurrency industry. As the legal proceedings unfold, the crypto community will be closely watching to see how this case shapes the future of corporate transparency and responsibility within the sector.

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