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  • J Huang and M Bacina

The clawbacks are coming: FTX advisors pursue millions

Updated: May 19, 2023

Alameda Research, now being run by restructuring advisor John Ray III and represented by law firm Sullivan & Cromwell under a joint Chapter 11 bankruptcy proceeding with over a hundred FTX affiliate companies, is seeking to recoup millions of US dollars spent on acquiring start-up Embed Financial.

According to a court filing on 17 May, Alameda Research alleged that FTX founder Sam Bankman-Fried (SBF) and other insiders misappropriated around USD$250 million of FTX's funds to pay for the acquisition of Embed Financial, a start-up dealer-broker that had been touted as a gateway for the cryptocurrency group to expand its offering to traditional securities products. As part of this transaction, FTX executives SBF, Nishad Singh and Gary Wang allegedly received benefits in the form of equity in one of FTX's affiliate.

In another law suit filed on the same day, Alameda sought to reclaim the money which Embeded Financials' former shareholders received. Alameda also seeks to recoup funds from former Embed Financial employees who received USD$75 million in "retention bonus" from the deal.

Alameda, through its lawyers, claimed that the funds were misappropriated from the FTX group just weeks before the Chapter 11 bankruptcy commenced, when the group was already insolvent. Under US bankruptcy laws, transactions can be voided on the basis they are "fradulent transfers" intended to take assets out of the pool otherwise available to creditors, and return those funds to the bankrupt estate.

A number of well-knowned Silicon Valley venture capital firms were on the list of defendants who profited from the transaction. They include Y Combinator, Bain Capital Ventures and 9Yards.

The complaints also detailed a series of transactions involving multiple accounts at now-defunct Signature Bank which Alameda's lawyers said were intended to create a false impression that the money used to acquire Embed Financial came from the personal accounts of SBF and other FTX executives instead of the company.

Embed Financial only had approximately USD$37 million in total assets and US$25,000 in net revenue at the time of acquisition. Alameda's lawyer said,

the purchase price ... for Embed was astronomical, particularly in view of Embed’s minuscule customer base and the serious bugs plaguing its software platform at the time of the acquisition

The filing also cited the words of an employee who revealed how faulty Embed Financials' technology was,

can’t really take ANY accounts . . . has to basically lie to get the deals he gets, but there’s fallout, and we aren’t managing it[.]

Another employee gave his opinion on FTX's team based on their prior dealing with one of FTX's affiliate which,

didn’t do a ton of [due diligence]

Following the US Department of Treasury and Internal Revenue Service's whopping USD$44B tax bill sent to the FTX group last week, these law suits could potentially add back amounts to the pool available for FTX creditors, which was previously reported to be at USD$7.3 billion with likely claims of USD$10B (excluding the IRS claim).

These proceedings will also add to SBF's woes, who is now facing 13 charges by the Department of Justice, though he denied all wrongdoing. It was also alleged that SBF received USD$2.2B from FTX just before the insolvency. More recovery actions against SBF and other former FTX executives personally may still be to come.


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