Why did FTX sue LayerZero Labs, the company behind the FullChain protocol?

According to the Kroll website of the FTX bankruptcy trustee, a court document released on 9/8 shows that FTX Trading Ltd. and its related entities have filed a lawsuit against LayerZero Labs Ltd., Ari Litan, and Skip & Goose LLC.

Here is a summary of the reasons for the lawsuit as described in the provided document excerpt:

FTX Requests Asset Transfer from LayerZero Before Bankruptcy

The lawsuit involves transactions and asset transfers between FTX and LayerZero Labs. The plaintiff seeks to avoid and recover certain assets and obligations transferred to LayerZero on November 8th and 9th, 2022, just before the Chapter 11 bankruptcy proceedings began.

FTX's Transactions with LayerZero

From January to May 2022, FTX-related company Alameda Ventures engaged in a series of transactions with LayerZero. These transactions involved Alameda Ventures paying significant amounts to acquire equity in LayerZero, as well as purchasing LayerZero's Stargate STG and LayerZero ZRO tokens.

LayerZero Demands $45 Million Debt from FTX

On February 4, 2022, LayerZero and other companies loaned $45 million to Alameda Ventures' parent company, Alameda Research Ltd., with an 8% annual return. Layer Zero: $21m Aug-Nov, Ari Litan: $13m 8th/9th Nov, Skip & Goose Litan owned: $6.5m Aug-Nov

Leading up to FTX's bankruptcy, media exposure of Alameda Research's balance sheet led to a liquidity crisis.

On November 7, 2022, LayerZero demanded immediate repayment of the $45 million loan to Alameda Research. Given Alameda Research's financial distress, LayerZero negotiated a deal where Alameda Ventures transferred all its equity in LayerZero in exchange for forgiveness of the loan.

FTX Overpaid?

FTX contends that the value transferred to LayerZero through these transactions far exceeded the value transferred from LayerZero to Alameda Ventures.

LayerZero Acknowledges Strategic Success?

FTX believes that in a letter to its investors, LayerZero seemed to acknowledge leveraging Alameda Ventures, claiming they had acquired equity in FTX/FTX Ventures/Alameda, token warrants, and all agreements in between.

FTX Asserts Recovery of LayerZero Assets

FTX argues that the transfers made on November 8th and 9th, 2022, just before the bankruptcy, were preferential and fraudulent, and can be avoided under various provisions of bankruptcy and Delaware law.

Note: According to bankruptcy law, certain transactions made by the debtor in the period leading up to the bankruptcy filing may need to be transferred to the bankruptcy trustee or returned to the debtor. This period is known as the preference period. On November 8th and 9th, 2022, LayerZero withdrew assets totaling approximately $21 million from its FTX.com account, including 152,500.05 APT, 406.47 AVAX, 71.81 BNB, 650.00 BUSD, 1,844.82 ETH, 7,205.00 FTM, 9,390.51 MATIC, 13,375,477.44 USDC, and 4,096,492.50 USDT.

FTX asserts priority over withdrawals from LayerZero, Ari Litan, and Skip & Goose LLC's trading accounts. Additionally, pending the avoidance or return of the assets by the defendants, the court will be asked to deny these companies' claims against FTX.

Conclusion

In summary, the lawsuit alleges that LayerZero and other defendants took advantage of FTX and its related entities' financial distress, resulting in unfair transactions and transfers. The plaintiff seeks to avoid and recover these transfers and obligations.