FTX estate sues LayerZero Labs to recover $86M transferred on eve of bankruptcy

Quick Take

  • The FTX estate is suing blockchain infrastructure company LayerZero Labs in an attempt to undo a $45M deal made in the midst of its collapse. 
  • The estate is also seeking to claw back over $40M in withdrawals made by LayerZero and its former COO from their accounts on FTX in the 90 days before its bankruptcy.

The FTX estate, led by CEO John Ray III, is suing cross-chain swap protocol builder LayerZero Labs in an attempt to undo a series of deals made by former FTX executives on the eve of that company’s bankruptcy. 

The lawsuit primarily concerns a deal made by former Alameda Research CEO Caroline Ellison with LayerZero Labs on November 7, 2022, four days before the bankruptcy filing. As part of the deal, Alameda agreed to sell back its 5% equity stake in LayerZero — worth $150 million at LayerZero’s current valuation, the lawsuit notes — in exchange for LayerZero forgiving a $45 million loan it had extended to Alameda. 

The lawsuit argues that at the time of the transfers, the FTX empire was already insolvent, so the deals constitute fraud under the bankruptcy code and should be reversed for the benefit of the bankruptcy estate. 

Alameda had also agreed to sell back to LayerZero 100 million of its Stargate (STG) tokens for $10 million. The company had paid $25 million for the tokens earlier that year. That transaction was never completed, despite the efforts of LayerZero Labs, which attempted to seize control of the tokens by reissuing them to a wallet controlled by the company, the suit claims, before being halted by the threat of a lawsuit from the FTX estate.

The two companies once had a close relationship, the lawsuit claims, with the FTX Group once arranging "accommodations for several months in the Bahamas for a dozen LayerZero employees and their families and dogs” and inviting LayerZero employees to Super Bowl parties and Miami Heat playoff games. Alameda Ventures first invested in LayerZero in January 2022. LayerZero did not immediately respond to a request for comment from The Block. 

Lawsuit seeks to claw back funds from before crisis 

The lawsuit also seeks to claw back withdrawals from the FTX.com and FTX.US exchanges made by LayerZero and its former Chief Operating Officer Ari Litan in the 90 days before the exchange’s bankruptcy filing.

LayerZero withdrew $21 million from its account on FTX.com in that time period, though about $16 million of that sum was withdrawn by the end of October, before the problems with FTX became widely known. The remaining $5 million was withdrawn on November 7, which is the same day LayerZero called its loan, the suit notes. 

In addition, the suit names Litan as a defendant and takes issue with approximately $19.6 million in withdrawals from FTX.US accounts made in the days before FTX’s bankruptcy filing, both in Litan’s name and the name of his LLC, Skip & Goose. “Those withdrawals constitute preferential transfers and are avoidable under Section 547 of the Bankruptcy Code,” the lawsuit states. 

The FTX estate has sued a number of companies and individuals in recent weeks in an attempt to claw back funds for its creditors. 

Disclaimer: The former CEO and majority shareholder of The Block has disclosed a series of loans from former FTX and Alameda founder Sam Bankman-Fried.

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