On crypto clawback claims.

It is commonly said:

"Don't look a gift horse in the mouth."¹

But what if the gift horse turns out to be a Trojan Horse?

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Before FTX went down, there were several beneficiaries of its largess.

The beneficiaries included the executives and shareholders of Embed, a stock trading platform. In June 2022, FTX announced that it was acquiring Embed.²

But just 5 months later, in early November 2022, FTX collapsed.

It now turns out that FTX had paid $220 million to acquire Embed.

FTX's liquidators recently tried to sell Embed, but the highest bidder was Embed's founder, who offered $1 million.

I suppose this is something like person A selling a widget to person B, for $220, and then later on, offering to buy the widget back for just $1. It reflects, to an extent, person A's perception of the actual value of the widget.

FTX's liquidators have now brought a claim against, among others, the executives and shareholders of Embed. They say that what FTX had paid to acquire Embed was "wildly inflated relative to the company's fair value", and that Embed's software was "essentially worthless".

Allegedly, Embed's own insiders were surprised that FTX paid so much for the company. In internal messages, they described FTX's approach to due diligence with a 🤠 emoji.

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Takeaways?

Anyone who received money from the sale of Embed should probably seek legal advice, and on a fairly urgent basis.

The more universal learning point would be:

Be careful who you accept large sums of money from.

And if you're in the business of regularly accepting large sums of money, and would like to mitigate your legal risk...

...get in touch.

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A concluding remark.

This isn't the first claim that FTX's liquidators are bringing. Earlier this month, it was reported that FTX's liquidators are bringing a claim against Genesis Global Capital, in respect of loans that were repaid in the weeks leading up to FTX's collapse.³

The difference, however, is that Genesis is now in bankruptcy itself. As such, FTX's liquidators' ability to recover from Genesis may well be limited.

But FTX's liquidators may not face similar impediments with the claim against Embed's executives and shareholders.

And FTX's liquidators' claim against Embed is unlikely to be the last.

You know who should be really worried?

Political donees.

More on this next time.