In the run-up to FTX’s bankruptcy filing, LayerZero Labs and Alameda Ventures negotiated last-ditch deals worth tens of millions of dollars. But now, the administrators of the FTX estate have brought a lawsuit against LayerZero in an attempt to recover $86M.
According to the complaint , dated September 11, transfers made to LayerZero were a breach of the bankruptcy code as FTX was already insolvent at the time they were made. However, the CEO of LayerZero Labs has denied the allegations.
It centers on a deal made by former Alameda Research CEO Caroline Ellison with LayerZero as she attempted to keep the sinking FTX ship afloat.
FTX’s new administration now claims that “LayerZero sought to capitalize on Alameda Research’s distressed financial position,” by demanding the immediate repayment of a $45M loan.
Under the terms of the deal, Alameda’s debt was forgiven in exchange for the return of a 5% equity stake it held in LayerZero. FTX’s complaint argues that this undervalued the 5% stake in LayerZero, which is worth $150 million at the company’s current valuation.
The lawsuit also points to other attempted deals between the two entities that ultimately fell through. For instance, the contemplated sale of Alameda Ventures’s 100 million STG tokens for $10 million—just 40% of what it had paid months earlier.
This, the complaint claims, further demonstrates “the inequitable nature of the arrangements that LayerZero negotiated with Ellison as she was frantically trying to raise cash.”
In addition to last-minute deals LayerZero cut with Alameda, FTX is also making a “preference claim,” against the company.
Under bankruptcy law, if it is proven that certain creditors received preferential treatment to others before going into a formal insolvency, those repayments may be void.
In the case of FTX, the exchange asserts that in the days before withdrawals were suspended, LayerZero was able to withdraw cryptocurrencies worth $21.37M at the time. In total, FTX wants to claw back around $40M worth of assets withdrawn by LayerZero and associated entities.
Based on these transfers, the recent lawsuit accuses LayerZero of seeking to “exploit the FTX Group’s liquidity crisis by negotiating unfair terms for the purported agreements with Alameda Ventures,” while at the same time “withdrawing assets from the FTX.com exchange, exacerbating the liquidity crisis.”
In his response to the FTX complaint, LayerZero CEO Brian Pellegrino denied the accusations made against his company and said the lawsuit is “filled with unsubstantiated claims.”
According to Pellegrino, LayerZero has been in contact with FTX liquidators for almost a year in a bid to address the ownership of the contested shares but has “been ignored for the entire time.”
Regarding the preference claim, Pellegrino argued that removing assets from FTX as the platform was engulfed in crisis was simply a matter of prudence. “When there is rumour or smoke, you exhibit caution until it’s resolved,” he emphasized.
“In no way did we know if FTX was insolvent at the time,” the LayerZero CEO added.