Thursday, February 29, 2024

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    FTX Initiates Legal Battle Against LayerZero Labs, Pursuing Recovery of $21 Million in Alleged Illicit Withdrawals

    Crypto Exchange FTX Sues Cross-Chain Protocol in Pursuit of Unlawfully Withdrawn Funds

    In a significant legal development, the insolvent cryptocurrency exchange FTX has launched a lawsuit against the cross-chain protocol LayerZero Labs. FTX seeks to reclaim a substantial sum of $21 million in funds that were purportedly unlawfully withdrawn prior to the exchange’s shutdown in November 2022, as detailed in court documents filed on September 9.

    This legal dispute traces its origins to a series of transactions conducted from January to May 2022, involving two key entities: Alameda Ventures and LayerZero. Alameda Ventures, the venture capital arm of Alameda Research, FTX’s sister company, engaged in these financial dealings.

    According to the court filing, Alameda Ventures executed transactions exceeding $70 million to acquire a stake representing approximately 4.92% ownership in LayerZero. Furthermore, in March, Alameda Ventures committed an additional $25 million to acquire 100 million STG tokens through a public auction. These tokens were intended to be distributed over a six-month period commencing in March 2023.

    Amidst these financial transactions, in February, LayerZero extended a loan of $45 million to Alameda Ventures’ parent company, Alameda Research, under a promissory note that carried an annual interest rate of 8%.

    When the crisis at FTX unfolded in early November, LayerZero initiated negotiations for the return of its stake held by Alameda. The proposed agreement encompassed the return of shares to LayerZero in exchange for the forgiveness of the $45 million loan. Additionally, a separate arrangement involving the 100 million STG tokens was devised. LayerZero intended to repurchase these tokens at a discounted price of $10 million on November 9. Regrettably, this transaction never materialized, as LayerZero did not remit payment for the tokens, and Alameda Ventures did not transfer them.

    FTX alleges in the lawsuit that LayerZero took advantage of Alameda Ventures during a critical liquidity crisis, stating, “LayerZero was well aware that Alameda Research was facing a liquidity crisis and, within about 24 hours, negotiated a fire-sale transaction with Caroline Ellison, Alameda Research’s then-CEO.”

    In addition to seeking the annulment of these agreements, the complaint aims to recover funds withdrawn mere days prior to FTX’s bankruptcy filing. This includes approximately $21.37 million attributed to LayerZero Labs, as well as $13.07 million associated with Ari Litan, the former chief operating officer, and $6.65 million linked to a subsidiary known as Skip & Goose.

    It is noteworthy that LayerZero Labs is not the first entity to be embroiled in a lawsuit initiated by FTX. The insolvent exchange is actively pursuing the recovery of substantial sums from transactions conducted by various subsidiaries prior to the conglomerate’s collapse.

    Media reached out to LayerZero Labs for comment but did not receive a response at the time of publication. Importantly, it should be noted that this lawsuit is unrelated to LayerZero Power Systems, a separate company holding the LayerZero trademark, and operates outside the cryptocurrency industry.

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