FTX Estate Takes Legal Action Against LayerZero Labs to Recover $86 Million

The FTX estate, led by CEO John Ray III, has initiated legal proceedings against LayerZero Labs, a cross-chain swap protocol builder. 

The aim of this legal action is to reverse a series of transactions arranged by former FTX executives just before the company’s bankruptcy. 

The transactions in question have sparked controversy and legal questions due to their timing and financial implications.

Central to this lawsuit is a deal made by former Alameda Research CEO Caroline Ellison with LayerZero Labs on November 7, 2022. 

This was just four days before the formal declaration of FTX’s bankruptcy. Under the terms of this deal, Alameda Research agreed to sell back its 5% equity stake in LayerZero Labs, an asset valued at $150 million, according to the lawsuit. 

In exchange, LayerZero Labs forgave a $45 million loan previously extended to Alameda.

The lawsuit describes that when these transactions occurred, the financial health of the FTX exchange was already weak, making these deals fraudulent under the bankruptcy code. 

Consequently, the FTX estate is seeking to have these transactions nullified to benefit the bankruptcy estate.

Moreover, Alameda Research had also committed to selling 100 million of its Stargate (STG) tokens back to LayerZero for $10 million. 

Earlier that year, Alameda had acquired these tokens for $25 million. However, this transaction never reached completion. 

LayerZero Labs made efforts to seize control of the tokens by reissuing them to a company-controlled wallet, as stated in the lawsuit. 

These efforts were only halted in response to the FTX estate’s threat of legal action.

The lawsuit reveals that FTX Group and LayerZero Labs had previously enjoyed a close-knit relationship. 

According to the complaint, FTX Group had provided accommodations in the Bahamas for several months to a dozen LayerZero employees and their families, including their dogs. 

Additionally, LayerZero employees had been extended invitations to events like Super Bowl parties and Miami Heat playoff games hosted by FTX Group. 

This close association shows the disputable nature of the legal action between the two entities.

Clawing Back Pre-Bankruptcy Funds

Beyond the transactions with LayerZero Labs, the lawsuit also targets withdrawals from FTX.com and FTX.US exchanges in the 90 days leading up to the exchange’s bankruptcy filing. 

Specifically, LayerZero and its former Chief Operating Officer, Ari Litan, are implicated in this legal action.

LayerZero Labs is accused of withdrawing $21 million from its FTX.com account during this period. 

Notably, around $16 million of this amount was withdrawn before the wider issues with FTX became publicly known. 

However, an additional $5 million was withdrawn on November 7, the same day LayerZero Labs initiated its loan call.

Furthermore, the lawsuit names Ari Litan as a defendant and takes issue with approximately $19.6 million in withdrawals from FTX.US accounts in the days preceding FTX’s bankruptcy filing. 

These withdrawals were executed in both Litan’s name and the name of his LLC, Skip & Goose. 

The lawsuit contends that these withdrawals constitute preferential transfers and should be deemed void under Section 547 of the Bankruptcy Code.

The legal action against LayerZero Labs is just one of several lawsuits initiated by the FTX estate in recent weeks. 

These legal actions are part of a broader strategy to recover funds on behalf of the exchange’s creditors.

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