American court hearing recordings and interviews - FTX/Alameda US bankruptcy court hearing Feb 29 2024, oral argument in adversary proceeding 23 50379

Episode Date: March 23, 2024

oral argument in adversary proceedings 23 50379 & 23 50380 adversary proceedings brought in connection with the FTX/Alameda chapter 11 proceedings in the District of Delaware styled Alameda Research Ltd v Rocket Internet Capital Partners II SCS et al.

Thank you. Please be seated. Good afternoon, Your Honor. Matthew McGuire, Landis-Rapton Cobb, on behalf of the debtors. The only thing we have on the agenda today, Your Honor, is two hours of oral argument on the motions to dismiss in the embed adversary proceedings. So I will cede the podium to counsel to the movements. Okay. Thank you. What?

Good afternoon, Your Honor. Luke Merley of Saul Ewing, local counsel to certain defendants. I rise to introduce my co-counsel from Cooley, Eric Wu, Erica Richards. and Colin Speckhardt. Mr. Wu will be handling the duties for today. All right, thank you. Good afternoon, Your Honor. Eric Wu from Cooley, LOP, may have pleased the court.

We represent 68 of the 97 remaining defendants in the Giles and Rocket adversary proceedings, including Mr. Giles, the founder of Enbed. All the defendants have moved to dismiss. Gregory Loffer from Paul Weiss, which represents 26 of the shareholder defendants, and the Giles action and I will present on behalf of all the defendants. I'm going to start by providing an overview of the Giles actions and rocket actions,

including some features of the case that are atypical for avoidance actions, and the grounds for defendants' motions to dismiss. I will then present argument on two case dispositive grounds for dismissal, and then I'll pass the baton to Mr. Loffer to present argument on what plaintiff's claims to recover payments for embed equity interests under constructive fraud. and state law fraud theories are barred by the safe harbor provisions of section 546 and why plaintiffs have failed to adequately plead a claim for actual fraudulent transfer and then I'll address the defendant's other motions and submit arguments

with the court's permission we'd like to hand up some demonstratives for defendants presentation you have them playing and put it up on screen and put them on screen yes thank you can ask my colleague Erica Richards if you made co-presenter at the Yes. We're doing that through Zoom or are you connected to the court system? Are you logged into Zoom? Okay. So, Your Honor, there are three named plaintiffs here, Alameda Research, West Realm Shire's Services, or WRS, which did business as FTX.U.S. It was a cryptocurrency exchange for U.S. customers. And then there was West Realm Shires or WRS, and was the parent of WRS.

I'm sure you're familiar with the FTX insiders, Bankman, Pris. Reed, Ellison Singh and Wang. And then relevant to this case is also FTX trading LTD, which did business as FTX.com. And it was an international cryptocurrency exchange. Plaintiffs seek to unwind WRS's acquisition of MED financial technologies and its subsidiary and that clearing.

MBED was a software company that provided proprietary technology used by its subsidiary embed clearing to a licensed broken dealer, custodian, and clearing firm. And a WRS subsidiary was an early embed customer, and WRS sought to acquire embed to provide its U.S. customers on the FTX.U.S. platform with ability not only to trade cryptocurrency, but also conventional securities like stock. So this diagram is taken from the debtor's first day declaration and depicts what the debtors of characterizes four business silos within the FTX group.

As you can see, WRS and FTX US, or WRSS, are over to the left in the WRS silo. Alameda is an Alameda silo, and FTX.com is over in the far right in the dot com silo. And as we'll discuss, plaintiffs here are trying to use an alleged fraud that occurred in the dot com silo to avoid a transaction that occurred in the WRS silo. WRS first approached Embed about potential transaction in March 2022.

And although Embed was a relatively young company, had a lot going for it. It obtained approvals from multiple regulatory bodies and clearing houses, including FINRA and DTC, and become a member of both the NASDAQ stock market and the investors' exchange. And while most broker-dealers rely on third parties to act as a clearing firm and custodian,

embed clearing was itself, authorized to serve as a clearing firm and custodian for equities options and mutual funds WRS decided to make an offer to bring MED services in-house and make FTX.us1 shop for its customers investment activities in June 2022 WRS and embed executed a merger agreement at the time the 220 million dollar purchase price was a small fraction of FTC's groups reported aggregate market value of $40 billion. Certain Embed employees entered into retention incentive award agreements. Mr. Giles, the founder and CEO of Embed, was entitled to receive $55 million upon the closing of the merger,

contingent upon them remaining employment through closing. And other key Embed employees were to be paid in installments beginning on the first anniversary, the closing, and concluding on the second anniversary. the closing. Over the next three months after they signed the merger agreement, Mr. Giles led in B. Through a process of obtaining necessary approvals of various regulators and licensing bodies for the transaction, and the merger ultimately closed on September 30, 2022, and 106 former

MED investors received roughly $243 million in payments for their equity interest. And plaintiffs to commence these adversary proceedings to recover. three different things. First, to recover the payments made to embed investors for their equity interests on the closing date. Second, to recover the retention award payment made Mr. Giles on the closing date. And three, to avoid what they contend are obligations of WRS to pay post-closing retention awards totaling $7.85 million to 20 other MBET employees. So we think, before we get

into the arguments, I think it's important to point out this is really not a run of the ill avoidance action where the plaintiff clearly has an enforceable property interest and the transferred funds seeks to recover instead plaintiffs alleged that all the money paid defendants in connection with WRS's acquisition of embed was misappropriated from Ftx.com and plaintiffs will say that's not so but as will show the complaints speak for themselves we have a diagram in here The gray part of the diagram is plaintiff's depiction of the flow of funds for the embed acquisition. It's a paragraph 53 of the complaint.

And what we've added in pink depicts the allegations from the complaint regarding Alameda's misappropriation of FTX.com funds. And although FTX.com was the target of the FTX insiders alleged misconduct and is a debtor, it is not a named plaintiff in this action. Because of the unusual posture in these avoidance actions, defendants have moved for dismissal of plaintiff's claims on multiple crowns. For the court's reference, we've prepared a chart here mapping the application of the different grounds for dismissal against plaintiffs' different claims to avoid the three categories of transfers and obligations at issue. And as you'll see, there are two grounds for dismissal that would result in complete dismissal in the case.

And I want to turn now to one of those two case dispositive grounds for dismissal. So in a central element of every avoidance claim is that the debtor made the transfer to be avoided, must have had an enforceable interest in the transfer property. And under common law, a party that steals property from another does not take title to the property. Here, plaintiffs allege that Alameda misappropriated FTC.com customer funds, and neither Alameda, so neither Alameda nor any of the other plaintiffs has an enforceable interest in the funds. This is not a Ponzi scheme where investors voluntarily give their money over

under false pretenses creating a voidable title. FTX customers didn't know about and had never consented to Al-I. You've finally broken loose from work. Three friends, one tea time, and then the text. Honey, there's water in the basement. Not exactly how you pictured your Saturday. That's when you call us, Cincinnati Insurance. We always answer the call because real protection means showing up,

even when things are in the rough. Cincinnati Insurance. Let us make your bad day better. Find an agent at cINFIN.com. In opposition, plaintiffs responded for the first time that Alameda co-mingled FTX.com funds with Alameda's own funds. And we've exerted just a couple of paragraphs from the complaint to show what the complaint actually alleges.

It alleges that all of the money paid the defendants was misappropriated. Rather than allege that Alameda had its own funds at the time of the embed transaction, which closed in September 22, the complaints allege that Alameda had negative balances in its holdings and could not repay what it owed, but had unfettered use of assets on the FTX.com exchange. The plaintiffs argued, well, the presumption should be that funds in a debtor's bank account are property of the debtor.

But that presumption here is directly rebutted by plaintiff's own allegations that the funds used to acquire embed were stolen from FTX.com. Alameda could not have taken an enforceable interest in funds stolen from FtX.com and could not have manufactured title on that stolen property by commingling the stolen funds with its own assets. And to the extent any part of the transferred funds really were not stolen from FtX.com, there's no theory of actual fraud.

The fraud theory and the complaint is that by causing Alameda to take money belonging to FTX.com and spend it on the FTX Insiders pet projects, the FtX insiders defrauded at FtX.com. cons creditors and that's at paragraph 27. Regardless of whether defendants were paid with stolen FTX stock funds, Almeda's own funds, or a mix of both, plaintiffs' claims are foreclosed by the subsequent good faith transferee provisions of section 550D. Count six of the complaints asserts the claim to recover under 550A1.

The plaintiff's own allegations show that the initial transfer here, whether it was from FTX.com or Alameda was not made to or for the benefit of defendants. And the two defendants were good faith transferees under 550B1. Rather than allege that FTX.com or Alameda transferred funds for defendants' benefit, the complaints alleged that an initial transfer was made at the direction of and for the benefit of the FTX insiders. We just excerpted three paragraphs of the complaint here. The FTX insiders caused Alameda to misappropriate funds from the FTS exchanges for their own benefits. The FTX insiders pursue the MBEQ acquisition to enrich themselves as WRS shareholders.

So because the complaints failed to allege that FTX.com or Alameda transferred funds for defendant's benefit, they can't recover under 550A1, and that should be sufficient to dismiss count six of the complaint. But the allegations in the complaints also make clear that recovery from defendants as transferees under 550A2 is barred by 550B1. 550B1 operates as a boundary on the powers of a trustee to recover estate assets and imposes a complete bar and a trustee's ability to recover from good, faith transferee, the value of the alleged initial transfer. The Third Circuit has acknowledged the critical function served by 550B1, noting that it may be properly viewed not as an affirmative defense, but as a limit on the scope of a trustee's

recovery powers that the trustee must show does not apply. Here, the court need not reach the issue of whose burden, who bears the burden on 550B1, because the complaints show that defendants are good to be able to. faith of the transferees from the face of the complaint. First, the complaints admit that each defendant gave value in the form of labor or a relinquishment of their equity interests. Second, the complaints admit that the FTX insiders concealed the initial transfers that plaintiffs seek to avoid and recover.

Defendants thus could not have had knowledge of the voidability of these initial transfers, whether they were from FtX.com or Alameda. leaves good faith. The complaints admit the WRS articulated a legitimate business purpose for acquiring embed, providing defendants with an objective basis to conclude the transaction was being pursued in good faith. This paragraph four of the complaints acknowledge that WRS sought to acquire embed so they could provide FTX US customers with the ability to trade stocks in addition to cryptocurrency. And the complaints also show

that each defendant had a subjective good faith basis for taking the transferred funds or obligations. They admit the WRS was already an embed customer, so the alleged speed and lack of due diligence FDX exercise in connection with the transaction was not a cause for concern. The transaction was subjected to a six-month regulatory review and approval process. approvals were obtained who served as an independent confirmation of defendants that the transaction with WRS was not improper and that shareholders were aware of and approved mr. jobs retention award so plaintiffs

suggested that mr. Giles attempted to conceal the amount or terms of his retention award or without support and the incentive agreements with embeds other employees required them to remain in at embed two years after closing to earn their full retention awards. Terms that would only be acceptable if those individuals subjectively believed Embed's business would be successful following the merger. Mr. Loffer will now address 546E and actual fraud

and I'll return lane. Thank you, Mr. Root. Good afternoon, Judge. Greg Lauer from Paul Weiss, Rifkin, Warden, in Garrison on behalf of certain M-Bed shareholder defendants. We represent the balance of the NBED shareholder defendants not represented by Cooley, the arguments that I'm going to be making today nevertheless apply to all the defendants. We raised two arguments in favor of dismissal in our

motion papers. One was actual fraud, and the other was the application of Section 546E, the Safe Harbor, and the Bankruptcy Code. I'm going to, if that's okay, with the court, flip those for purposes of this presentation. Let's start with the Safe Harbor. This is actually a very easy application of section 546e. I know your honor is of course very familiar with the safe harbor provision in the code, but just to level set for everybody, it provides the trustee, or here the plaintiffs, can't avoid a transfer that is a settlement payment or a transfer made in connection with a securities contract and is made by or to or for the benefit of a financial institution. If the transfer that the plaintiffs are trying to prevent is covered by the safe harbor,

and all of the federal constructive fraud and all of the state law claims are barred. And the only thing that would remain would be the actual fraud claim in Section 548A on A in count one. But I will address that allegation or that claim when I reach the lack of allegations regarding Sienter. So let's drill down a little bit on the safe harbor.

There are several issues here that are not in dispute and in fact are clear from the face of the complaint. One, there's no dispute that the transfer at issue here is a settlement payment. It's also undisputed that the transfer at issue was in connection with a securities contract. The plaintiffs also do not debate that Western Alliance Bank, which is the bank that WRS retained in order to effectuate the transaction, is a financial institution within the meaning of the statute. It's also not challenged that WRS, the entity that actually made the payment to the embed

shareholders, transferred the merger consideration to Western Alliance Bank as its paying agent. And it's also not seriously challenged that Western Alliance Bank then distributed the merger consideration to the embed shareholders and got shares in exchange from the embed shareholders and then flipped the shares and the money in the reverse direction. There are really only two issues that the plaintiffs have raised in an effort. to circumvent the application of 546E, and neither of them works. The first issue that the plaintiffs have raised is a question of statutory interpretation,

and it relates to Section 10122A, which says that when a financial institution acts as an agent for a customer in connection with a securities contract, that customer is also a financial institution. There is no, or can be, no serious debate that that's what the statute actually says in Of course, as your honor is aware, if the statutory language is plain and unambiguous as it is here, it has to be enforced as written. So what are the plaintiffs do to... You've finally broken loose from work. Three friends, one tea time, and then the text.

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They have mischaractered. They say that we're trying to safe harbor a transaction because there was supposedly an intermediary involved in the transaction, and they have described Western Alliance Bank as that intermediary. That is totally inaccurate. What we have argued, and what is clear on the face of the complaint,

is that because Western Alliance Bank was acting as WRS's and the embed shareholders agent in connection with the transaction, WRS and the defendants themselves are also financial institutions under the statute. But again, you don't need... Where does it say that in the complaint? I'm sorry? What does it say that in the complaint

that they were acting as an agent for WRS? It is in the merger agreement, which is incorporated by reference, and I can give you a site... Merger agreements specifically say that they are not an agent for WRS. I just looked at the language. There's language in the agreements that say it's not. That the bank is not acting as an agent for anybody in connection.

That's the escrow agreement, which is the document that the plaintiffs relied on. The paying agent agreement, which is the actual substantive document that governs the relationship between WRS and Western Alliance Bank, that document very clearly says quite the opposite. And that's the document that concerns the $236 million murder consideration, the escrow agreement that the plaintiffs are relying on concerns $250,000 in escrow money.

All right. Go ahead. Thank you. The other thing that the plaintiffs have said is that the defendants have supposedly misinterpreted or misconstrued the merit decision issued by the Supreme Court. That's actually also totally inaccurate. They claim that merit has decided this issue, whatever this issue is, in a way that's unfavorable to the defendants. In fact, the Merit Court and footnote two

very clearly carved out from its decision. The question, whether a customer qualifies as a financial institution when the financial institution is acting as an agent, that issue was not raised by the parties, but as we pointed out in our moving papers, even so, A, the statutory language is clear, but B, Justice Breyer, and this is reflected in the oral argument transcript, said in open court

that it was easy for him. him to reach the conclusion that under the statutory language, a customer would be a financial institution if the financial institution was acting as the customer's agent. And in the face of this authority, the plaintiffs have not pointed, Your Honor, to a single decision from any court that holds that a customer of a financial institution is not or cannot be a financial institution when the financial institution is acting as the customer's agent. And in fact, we have cited cases that square. support our view of the law and they post-state merit and those include the Tribune and

9 West decisions from the Second Circuit and the Kelly versus Safe Harbor managed account case from the 8th Circuit divided decided in 2022 and I should also point out that after this motion was fully brief the Second Circuit decided 9 West we is sent to the court a notice of supplemental authority the plaintiffs I think tellingly did not respond to that supplemental authority because there really is no answer. Even the one case that the plaintiffs rely on decided by a bankruptcy judge in Michigan, that's the Greek Town case, recognizes the possibility

that that is the way the statute should be read. It just so happened that in that particular case, and I'll come to this again in a moment, the Griethown judge concluded that there was no agency relationship on the facts of that matter, but it's clearly distinguishable from the matter here. So how do we decide whether there's an agency relationship here?

It's actually pretty simple. You look to the restatement, which is what courts have said. You look to common law agency principles. I think every law student will remember that in order to find the existence of an agency relationship, a principal has to manifest assent to the agent, that the agent will act on the principal's behalf. The agent has to manifest acceptance, and the principal has to maintain control of the transaction or issue at hand. We have two precedents from the Second Circuit that I've already. already mentioned that are squarely on point.

That's the Tribune decision and the Nine West decision. And both of those cases, which by the way, were decided at the pleading stage in the face of a motion to dismiss, concluded on materially indistinguishable facts that an agency relationship existed. And just to give a little bit more color, in the Tribune decision, the financial institution was an entity called Computer Share

that acted as Tribune's agent in connection with an LBO tender offer. And in that transaction, Tribune deposited the purchase price for the shares with Computer Share, which was the financial institution, and then entrusted and directed Computer Share to pay the shareholders, and Computer Share did so at Tribune's request. Similarly, in Nine West, Wells Fargo, of course, a financial institution, was an agent or deemed to be an agent of Nine West in connection with an LBO again, where Nine West deposited the merger consideration with Wells Fargo, pursuant to a paying agent agreement, much like we have here. And pursuant to that agreement, Wells Fargo then distributed the consideration to nine West shareholders to consummate the LBO.

And in both of those cases, this is language actually from the district courts, I believe Judge Kote and Judge Rakoff referred to what I just described in both of those cases as, quote, a paradigmatic principal agent relationship. That's what those courts said, and the Second Circuit affirmed in relevant respects in both of those decisions. We have the same situation here in the merger agreement. In Section 3.2A of that agreement, the agreement says that WRS will pay the merger consideration to Western Alliance Bank, and then in Section 3.2B, it says that Western Alliance Bank would effectuate the transaction by distributing the merger consideration to shareholders. There is no dispute from the plaintiffs that that is precisely what happened. And just to put a little bit more flush on the bones of the agency issue, the WRS and the end-bed shareholders of defendants made clear that Western Alliance Bank would actually be acting on their behalf in connection with the transaction.

And Your Honor, to your question from a few moments ago, the paying agent agreement, that's the agreement under which hold a merger consideration but for the $250,000 in escrow money was paid, states that WRS, quote, hereby appoints, unquote, Western Alliance Bank to, quote, serve as paying and exchange agent, unquote, in connection with the transfer. And then there are other provisions on top of that that made clear that Western Bank was acting on behalf of those principles. For example, Section 1.02 of the Paying Agent Agreement clearly says that Western Alliance

Bank would establish an account on behalf of WRS to receive and distribute. the merger payment. And then, of course, there are the other elements of the agency relationship from the restatement that I articulated earlier. Under the Paying Agent Agreement, Western Alliance Bank, quote, hereby accepts its appointment, unquote, as the paying agent. And of course, the principles, WRS and the NBED shareholder defendants maintained control. And by the way, that's kind of obvious from the circumstances.

It's not like Western Alliance Bank was just taking the money and then willy-nilly giving it to whoever it wanted. It took the money because it was hired to do that pursuant to the agreement by WRS. It gave the money to the MED shareholders and it took the shares from the Mbed shareholders and gave it back to WRS because that's what the principles told it to do. So the plaintiffs don't even argue that these facts are somehow distinguishable from Tribune and Nine West because they aren't. Instead they say, oh, well, there's no fiduciary relationship. And again, they point exclusively to the escrow agreement, which, which is a which does in fact have a waiver of fiduciary duties,

and I don't mean to do my colleagues on the other side any favors, but I will. The paying agent agreement, likewise, has language suggesting that there is no fiduciary relationship. That is irrelevant. A fiduciary relationship and an agency relationship are not the same, and in fact, even the Greek town decision from the Michigan Bankruptcy

Court that the plaintiffs like so much doesn't say anything to the contrary. And in fact, in Greek town, again that famous decision, the relevant agreement, which was governed by Michigan law, had an agency relationship waiver. That's what it said. It may have had a fiduciary waiver, too, but it specifically disclaimed an agency relationship. We don't have that here.

The paying agent agreement issue in this case says that the agent's duties are non-fiduciary in nature, but it does not disclaim an agency relationship. And in any event, as we pointed out in our motion papers, this agreement is governed not by Michigan law like in Great Town, but New York law. In New York, under New York law, waivers of an agency relationship are ineffective under the case law if the document itself makes clear that the parties aren't in fact acting as agent and principal. And that's exactly what we have here. So for all these reasons, Section 546E bars all of the claims in this matter,

save for count one's Section 548A1A claim, and we believe that all of those claims should be dismissed on that basis alone. Let me turn, Your Honor, briefly, to the actual fraud argument. There are no adequate allegations of fraud for respect to the Section 548A1A claim. And there are two main problems with the plaintiff's theory. Let's go to the next slide, please. First of all, the complaint itself alleges that WRS,

and I think that my colleague, Mr. Wu, alluded to this earlier, that WRS set out to buy embed to expand F-TXism, customer reach and operations and to enable it to trade not only in cryptocurrencies but also in stocks those allegations again from the plaintiff's own complaint also make clear that the FTX insiders would quote enrich themselves as WRS shareholders unquote because of what they anticipated to be embed success in expanding FTX's business operations the complaint then goes on to say that the FTX insiders expected WRS stock to

in value precisely because of the embed acquisition. That is irreconcilable with the notion that they set out to defraud creditors of WRS. And then just to put some icing on the cake, the complaint also goes on to say that WRS was snookered into paying too much for embed or into buying embed. In fact, the complaint goes to great lengths to say that the embed folks knew about all sorts of bugs and defects. You've finally broken loose from work. three friends, one tea time, and then the text. Honey, there's water in the basement.

Not exactly how you pictured your Saturday. That's when you call us, Cincinnati Insurance. We always answer the call, because real protection means showing up, even when things are in the rough. Cincinnati Insurance, let us make your bad day better. Find an agent at cINFIN.com. from the FTX insiders and the WRS folks. Well, that suggests that as alleged at least in the complaint,

the FTX insiders and WRS were actually the victims of fraud at the hands of the embed people, not that WRS set out to defraud their creditors by colluding with embed. And then, so what do they do to get around these problems? They rely very heavily on what I think at this point your honor is probably more familiar with this than anybody in the world, the FTCS fraud. We all know what happened. We've all, via the papers, there are court papers all over the country, and in particular in this court, about the misappropriation of funds as between FTX and Alameda.

There is no allegation, no allegation of fraud related to the use of those funds used to acquire MBET, the transfer that the plaintiffs actually seek to avoid from WRS to the MBED shareholder defendants. And the fact that the plaintiffs do not connect the fraud at the FTX to the embed acquisition is only further evidence by the exhibits that they've relied on. They've relied very heavily on plea allocutions, certain FTX insiders, to the effect that there were all sorts of financial shenanigans at the company. They've also relied on Mr. Bankman-Fried's indictment to suggest that all these people were doing bad things.

That may be, but it has nothing to do with the case that we're dealing with. now and it has nothing to do with whether they pled actual fraud necessary to sustain it by 48 a1 a claim the plea out colloquies the indictment I don't even think that the two-month trial before Judge Kaplan for all I know mentioned the embed acquisition I could be wrong about that but it's certainly not argued by the plaintiffs none of that has anything to do with this deal so that's the actual fraudulent intent we then move on to badges of fraud there are not I know that your honor knows all these badges of fraud from the case law so I I won't tick them all off, but let me tell you the ones that are significant that aren't here.

There is no allegation in this complaint that the FTX insiders had any interest in MBED before the acquisition. There is absolutely no allegation in this complaint that the FTX insiders retained control over the funds that WRS used to buy MBED. There is no allegation in this complaint that there was a transfer of all, much less substantially all of the debtor's assets and connection. with this deal. And then finally, there is no allegation whatsoever that this deal was done in a shady way or that it was, I'm sorry, that it was concealed from the public. To the contrary, as we pointed out,

there was actually a contemporaneous press release by a senior FTX executive trumpeting and praising the deal and disclosing its material terms. So for all those reasons, the badges of fraud are simply absent here. So again, what are the plaintiffs do to try to get around the problem that they have? they have relied, I would say, heavily or even exclusively

on the drive train decision from this court. That case is totally distinguishable. They try to use language in drive train to suggest that they don't have to plead badges of fraud where the transfer issue was part of what they call an overall scheme or facade. And they quote quite liberally from drive train. But the facts are totally distinguishable in drive train.

What happened in drive train is that there was actually collusion and the debtors actually tried to create and were alleged to have created falsified revenues to boost their earnings and appearance to the public. That's not what happened here. There was an arm's length transaction with sophisticated parties on both sides and there's no allegation that WRS tried to falsely boost revenues based on Edbed's revenues or NBEDs finances. There's just nothing like that at all.

And in fact, the opposite is true. the complaint actually says that the FTX insiders believed and expected that the acquisition would provide real value to WRS through, as I said, expanded business operations and WRS stock appreciation. So for all those reasons, and I don't think that the plaintiffs have meaningfully answered that showing on any of the points I raised, there are no adequate allegations of fraud necessary to sustain the Section 548A1A claim, and we believe that that claim should likewise be dismissed. Unless you have any questions, I will turn the podium back to my colleague,

Mr. Wu, for the balance of the argument. Thank you, Mr. Law. Thank you. Your Honor, picking up on, move now to plaintiff's failure to all the requisite elements of constructive fraud. Constructive fraud claims require plaintiff to prove that the debtor that made the transfer to be avoided was insolvent at the time of the transfer or rendered insolvent as a result of such transfer. plaintiffs appear to contend that Alameda was the initial transferor here and rely on conclusory allegations that Alameda was insolvent at the time of the transfer but those allegations are contradicted or undermined by their own schedule the debtors scheduled assets and liabilities which report that as of November 22 Alameda had assets that exceeded liabilities and plaintiffs

also don't have to allege any facts supporting their statement that WRS the debtor that acquired embed was insolvent at the time of the embed transaction and it doesn't appear that they could either again the amended schedule of assets and liabilities report that as of November 22 WRS had assets that exceeded their liability turning next to the to the future retention payments that the be made to embed employees other than Mr. Giles. They seek to avoid those obligations on the ground that their WRS's obligations to pay those retention awards, but that's just not the case when you look at the retention incentive

award agreements. They make clear that the obligation to pay the retention awards rests with embed, here the company, and the WRS's capacity as embed's parent just has the obligation to direct that embed pay the retention awards. You'll see in paragraph one says a buyer will cause a company, or if applicable, another member of the FTX group to pay or cause to be paid to employee each retention incentive payments. The plaintiffs rely on the purple highlighted parenthetical or, if applicable, another member of

the FTX group, that's a red herring. WRS can direct another member of the FTX group to pay if MED assigns the agreement to another entity. But there's been no assignment of MEDs obligations, much less to any of the plaintiffs here. So just quite simply, the bankruptcy code doesn't permit a debtor to avoid obligations but non-debtor. So we think all the claims related to these obligations should be dismissed. Turning to Mr. Giles' incentive payment, plaintiffs seek to avoid the retention award for paid to Mr. Giles on the closing date as a preferential transfer. But under 547B2, transfer can only be avoided as a preference if it was made for on account

of an antecedent debt owed by the debtor before such transfer was made. Here when you look at Mr. Giles' retention incentive award agreement, it's clear that the retention award was not paid on account of an antecedent debt. obligation to pay Mr. Giles the retention bonus both arose and was satisfied on September 30, 2020, the closing date. Third Circuit said when there's no delay between when the debt arises and the payment of the obligation transfer is by definition not on account of an antecedent debt and falls outside the scope of 547b. Courts in this district have similarly held that a debt is deemed to have been

incurred on the date upon which the debtor first becomes legally bound to pay. That's trustee of MP creditor versus Maryland Department Environment District of Delaware 2016. So the plaintiffs cite an SDNY Enron case, but that case has been essentially superseded by the Second Circuit's decision in Tribune and Tribune, and other SDNY courts have similarly recognized that, including we've cited in our brief the Piazza case from 2022. So we think it's pretty clear that count five of the claims should be dismissed. Just to tie things up before we hand it over to plaintiff's counsel, we think this is an ill-conceived lawsuit. Just because the FTCX insiders engaged in fraud doesn't mean that every transfer by an FTCX entity

was made with fraudulent intent. And just because transfers made by FTCX entities are avoidable doesn't mean the debtors have an unfettered right to recover the value of those transfers from any subsequent transferee they can be traced to. The line is clear. Parties there are at least one step removed from the initial transfer

and take the property for value and in good faith are not liable to make a debtor's creditors whole. Here the defendants receive the consideration for the embed sale directly from a debtor in these cases, WRS. So the most straightforward path would have been for WRS to bring in action to avoid that immediate transfer. But they didn't do that. Why?

Because we think they recognized that there was no basis to avoid that transfer on a standalone basis. There's no actual fraud. There's no constructive fraud or preference claim because WRS was solvent, and the 546E Safe Harbor applies. So plaintiffs looked further back along the chain of transfers, for a debtor that they could try to tie to the FTX insiders misconduct. They settled on Alameda and threw up a hodgepodge of allegations that have no bearing on the trans... You've finally broken loose from work. Three friends, one tea time, and then the text.

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and reserve the balance of time for the plaintiffs. A lot of what your honor just heard was extremely dependent on facts, including facts that are nowhere in the complaint, facts that are misrepresented or mischaracterized from the complaint and frankly should not be considered at all on a motion to dismiss the allegations of the complaint in this case are are simple and straightforward the four key FtX insiders three of whom Caroline Ellison Nishad Singh and Gary Wang pled

guilty while the fourth the ringleader Sam Bankman-Fried was recently convicted operated a massive scheme to defraud creditors for their own benefit and much to the detriment of the creditors of the various entities within the FTX group. That scheme involved numerous legal entities including all of the plaintiffs here and it involved the misappropriation of funds to personally benefit the FTX insiders enabled by a complete lack of controls and record-keeping. As part of an in furtherance of that scheme the FTX insiders caused the plaintiff Alameda to transfer funds to the plaintiff

WRS, West Realm Shires, through the plaintiff, West Realm Shire services, to buy M-BED for a wildly inflated price without due diligence. The FTX Insiders executed phony loan documents and engaged in phony exchange transactions to create the false appearance they had borrowed money from Alameda to buy M-BED, and I'll speak a little bit more about that. The defendants here ignored that. At the same time, internal M-BED communications indicated that M-BED's technology was riddled with bugs and among other things that the founder Michael Giles lied to sell his companies. That's a quote from a high-ranking executive at Embed. Approximately six weeks after the closing of this transaction, FTX collapsed. And then a few months after the closing,

Embed's founder, defendant Michael Giles, who had pocketed over $100 million for his embed shares, plus $55 million styled as a retention bonus for a mere 16 weeks of work, bid only $1 million to buy Mbed back, another fact that the defendants here completely gloss over. We think the natural consequence of this course of conduct was clearly to hinder delay and defraud the creditors of the plaintiffs and other debtors. To try to cut this case off at the outset, the defendants are arguing mainly about technical points, and they're helped by the nature of FTX's fraud and the lack of controls and record-keeping the kind of disorderliness of this situation.

And they see that this court will draw inferences. from the allegations of the complaint. In particular, they're asking the court to draw inferences that are unfavorable to the plaintiffs at this early stage. That's obviously not allowed. On a motion to dismiss, the court is obviously supposed to accept the well-planned allegations of the complaint is true and to draw all inferences in favor of the plaintiffs. And the inferences here that are favorable to the plaintiffs that can be drawn from the allegations

of the complaint are that the FTX Insiders acquired embed to prop up and grow the fraudulent the dishonor, Your Honor is well aware of. To maintain the appearance of a legitimate, profitable business, to ensnare new investor victims, and to increase the funds available to them to misappropriate. In some, the complaint alleges that the embed acquisition was part and parcel of the FTX Insider's fraud scheme. This court should permit all the plaintiff's claims to proceed

through discovery and not cut off the estate's attempt to recover over $250 million for creditors right the outset of this case without discovery. I'm going to address first the point that the defendants began with that the complaint alleges that the plaintiffs have a property interest in the funds that were transferred. The defendant's argument here is largely based

on an incorrect reading of the facts. And they argue that all of the money used to buy embed was misappropriated from the dot-com exchange, FTX.com. That's nowhere in the complaint. The complaint does not allege that. And in fact, as your honor is aware, and as fact discovery in this case we believe will show, the funds at Alameda came from various sources. One of those sources of the funds at Alameda was, in fact, misappropriation from the dot-com exchange.

But there were also situations where dot-com investors wired their money directly to Alameda. And of course, Alameda also had its own investments in its own cash. So the funds at Alameda had various sources. Let me ask you a question. Does the complaint say that, as you say, the complaint does not allege that all of the funds came from? But does the complaint allege that the opposite of that, that some of the funds did come from Alameda or some other source? It does not explicitly allege that, Your Honor. The complaint alleges two things, that all of the funds.

the funds used to buy MBED came from Alameda. That's number one. And that Alameda misappropriated funds from the dot-com exchange. But it does not tie those two things together such that it alleges that all of the funds used to purchase embed came from the FTX.com exchange. It does not allege that. The key here we think is that the complaint alleges that the funds that were used to purchase embed came from bank accounts in the name of the plaintiffs, Alameda,

West Realm Shire Services and West Realmshire's. And there's clear case law on this to the effect that deposits in a debtor's bank account belong to the entity and whose name the account is established. And then that presumption holds even where the account contains commingled funds. The defendants argue that the complaint doesn't explicitly explain this commingling issue. As the court's aware, there was a report submitted by John Ray about a month after, I think, complaint was filed that explains this commingling in some detail and we cite that report document 1704 at footnote 3 of page 9 of our opposition brief which is

document 153 that rule that that presumption comes as explained in the case in re FBI wind down which is a case from the Delaware Bankruptcy Court from 2018 and the court there said it's well-settled case law that any bank accounts under the legal title of the debtor as well as well as any deposits in such accounts credited to the debtor are presumptively considered property of the debtor's estate and that this presumption holds even in cases where the account contains co-mingle funds. We think this directly on point.

We've alleged that these funds came from bank accounts in the name of the three plaintiff debtors in this case and we think that's enough. The idea that the plaintiffs here don't have a property interest is related, it's related to the argument that the plaintiffs here are, the defendants here are subsequent transferee They sort of both depend on this issue. And they're both wrong because there's no case where a result like that that the defendants are seeking here was obtained, where you have a situation like this,

which is essentially you have four corporate affiliates. So even if you include FTX.com sort of in the flow of funds here, you have FTX.com, Alameda, West Realm Shire Services, and West Realm Shires. All four of those entities are controlled by the FTX insiders who are all criminal fraudsters who are not observing corporate formalities, who are not keeping proper records, as this court is well aware, to say that the second one in the chain or the third or fourth one in the chain doesn't have a property interest, even though the first one does,

or that there's some break there whereby the defendants become subsequent transferees. Neither of those things is supported by any case that's on point with this one. The next point I'd like to address is this issue of whether the complaint adequately pleads intentional fraudulent transfers, which was dealt with by Mr. Laffer. Just to state the obvious and sort of the foundation of this, the plaintiffs only have to allege that transfers were made with actual intent to hinder, delay, or defraud, present or future creditors. And that includes situations where the natural consequence of the

the decision-maker's actions was to hinder delay and defraud creditors because when people act in that way, they're presumed to intend the natural consequences of their acts. And we think it's very clear that the natural consequences of the FTX Insiders acts here in acquiring embed were, in fact, to hinder delay into fraud creditors, basically siphoning $250-plus million out of the estate

six weeks before the collapse of FTX. There are a number of allegations in the complaint that allegedly alleged fraud, making the badges of fraud unnecessary, and I'll get to that in a moment. But the direct allegations of fraud include the following. At paragraphs 26, 27, and 32, the complaint alleges that the FTX insiders used to alimede it to siphon money from the exchanges to, among other things,

finance acquisitions to project an image of growth and profitability. At paragraphs 34, 66, and 67, the complaint alleges that the FTX insiders covered their tracks by falsifying financial statements, inflating revenues, obscuring the relationship between Alameda and FTX at paragraphs 28, 49, 50, 51, and 52. And these are very key paragraphs. The complaint alleges that the FtX insiders entered into deals like MED to maintain, prolong, and expand the scope of the fraud and used phony loans and exchange transactions and created a... You've finally broken loose from work.

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Cincinnati Insurance, let us make your bad day better. Find an agent at CINFIN.com. The defendants didn't mention it, but if you look at those paragraphs of the complaint, it's clear that we allege that in connection with the embed transaction itself, the FTX insiders entered into phony loans that were not real loans to pay for the transaction. And those aren't allegations about the source of the funds. We're not just alleging there that the funds were misappropriated.

We're alleging that they did something, the FTX insiders did something, entering into phony documents, loan documents that were one page long and had no real repayment terms and, in fact, were never repaid. that those phony documents speak to the state of mind of the insiders in entering into this very transaction. The complaint, going back to the complaint, we think it's clear, paragraph 36, among others, cites guilty pleas that may clear that the embed transaction was part of keeping up a charade of FTX's legitimacy, which the FTX insiders have admitted to. They don't mention the embed transaction in particular, but it's very clear that it fits right within what they're talking about.

And finally, whether the embed business itself was a legitimate business, which the defendants emphasize, is really irrelevant and doesn't negate the fraudulent intent of the FTX insiders in entering into this transaction. So we think all of that alleges more than alleges intentional fraud here directly without regard to badges of fraud. But if you look at the badges here, there are a few badges of fraud. First of all, each plaintiff was insolvent at the time the transfers were made. The plaintiff entities didn't properly account for their assets and liabilities,

and the FTX insiders testified in their guilty pleas that Alameda and other entities were insolvent at all relevant times. Just a few examples of this in the first day declaration at paragraphs 56 to 57, in the complaint at paragraph 65 and 66, in Exhibit C to the complaint at page 20. 28, 9 through 16, and again at page 27 and 28, which recounts Caroline Ellison's testimony that she provided materially misleading financial statements to Alameda's letters, concealing billions of dollars in loans that Alameda had made. And again, the excerpt of Nishad Singh's testimony, that when the MBET acquisition transfers were made, Alameda could not repay what it owed.

That's at exhibit B, page 29, lines 2 to 3. In any event, Your Honor, insolvency is obviously a factual issue and not suitable for decision on a motion to dismiss. I do want to raise briefly the point that Mr. Wu made in his argument relying on schedules that were recently filed. Those schedules do not reflect liquidated liabilities, Your Honor. Those are rather unliquidated liabilities. So customer claims and other digital asset claims are not reflected in those schedules. Those schedules do not reflect that any entity was solvent. Those schedules are incomplete at this time.

They will, at some point, we will see the liquidated claims, but that's not reflected on those schedules, and those are obviously not evidence of solvency. And certainly they're not referenced in the complaint. They're completely outside the record here. So that's insolvency. The next badge is the defendants did not give reasonably equivalent value in exchange for the transfers. We allege at length in the complaint that Embed had almost no revenue.

I think the revenue is $25,000 net for a company that the FTCS insiders agreed to pay more than $250 million for. It had only $37 million in assets. It had few customers. Its biggest customer was FTX itself. And it had buggy technology. And critically, the founder of the company bid a million dollars to buy the company back a few months after he sold it for over 250 million. Again, however, reasonably equivalent value is also very factually dependent, and we think we've alleged more than enough to allege it, but it's a fact-specific inquiry that's not appropriate for motion to dismiss either.

And finally, on badges, there is a haste and unusualness to this transaction that is reflected in the complaint. for example at paragraph 28 where it's very clear to us that this transaction was done with a kind of speed and lack of diligence and lack of real negotiation that really calls into question what was going on here and and we think that also serves as a badge of fraud if you if you look at for example in the sharp case cited by the by the defendants there's a reference to to the HBE Leasing Corp v. Frank case from the Second Circuit that talks about haste and unusualness as a badge of fraud. So we think we've alleged directly alleged fraudulent intent

and have badges on top of the direct allegations, which considered holistically is more than enough to allege fraudulent intent here with respect to this transaction sufficient to overcome this motion. In trying to overcome constructive fraudulent transfer, The defendants rely on several affirmative defenses that are fact-specific, none of which we think are appropriate for a decision on a motion to dismiss. I'll start with the Safe Harbor defense that Mr. Laufur discussed, Section 546E,

and that argument is based on the role that a financial institution, Western Alliance Bank, played under two agreements. The defendant's opening briefs referenced the escrow agreement, which I think at this stage the defendants are not really relying on anymore. There was a reference in the defendant's opening briefs also to an exchange agreement, which was not attached but was mentioned in the merger agreement, just said that that would be entered into. On reply, the defendants attached a paying agent agreement.

They didn't attach that in their opening brief. But both of these documents say critically, that the role played by Western Alliance Bank is non-fiduciary, that's quote, and purely ministerial in nature, quote. So both of those documents have that language. To his credit, Mr. Lauffer mentioned that in his argument. He didn't mention it in his reply brief.

But that language, we think, is critical here because it disclaims and shows that Western Alliance Bank is not really acting as an agent despite any label that might have been put on their role. If you start with merit management, which is the Supreme Court's decision, which is obviously the most important one here, we think that supports our reading of these cases. The Supreme Court there held that the only relevant transfer

for purposes of the safe harbor is the transfer that the trustee seeks to avoid, and an intermediary bank is simply irrelevant to the analysis under Section 546E. That's at page 895 of the court's decision. The basic principle there, the court was resolving a circuit split, and the basic principle there was that intermediaries or mere conduits are irrelevant. You don't consider them. It doesn't matter that transfers go through a financial institution.

What you're looking at is who's the entity seeking to get the money back and who are they seeking to get it back from. And that's consistent with bankruptcy policy. The defendants rely on two Second Circuit cases, the Tribune case and the Nine West case, which Mr. Lappor discussed, we think those cases read in light of the Supreme Court's decision and merit management support our arguments, and there's language in those cases which I'll explain we think is actually quite important here in light of the language of our agreements. The Tribune Court, to start, defined agency in Section 101.22 as, quote, a fiduciary relationship.

Feduciary relationship, that's 946 F3rd at 79. Then in the Second Circuit's decision in Nine West, which is 87F4th 130, the court said that where a financial institution's role is, quote, purely ministerial, remarkably the exact same words that are in our agreements, there's no agency relationship. And Section 546E does not apply. The court said that where that is the role, the purely ministerial role, that role is the role of an independent contract. not an agent. And so if you just apply the discussion that I just mentioned from Tribune on fiduciary relationship and the purely ministerial discussion from Nine West,

here, our agreements say non- fiduciary, purely ministerial. And we think that's very important here. It shows that even under those cases, this transaction does not fall under the safe harbor. Courts have also recognized that reading Tribune in the way that the defendants are advocating here would render merit management a nullity. The Greakown case, which is an Eastern District of Michigan case, and the defendants disparage it for that reason, but it's actually a very well-reasoned case and discusses this issue at length, says that Tribune would result in a complete workaround of merit management, and that it did not distinguish between mere intermediaries contracted for the purpose of effectuating a transaction,

It's exactly what Western Alliance Bank was here, and agents who are authorized to act on behalf of their customers in such transactions. As I say, even if this court were inclined to follow Tribune in Nine West, which obviously this court is not obligated to follow Second Circuit decisions, we think those cases could be read here as excluding this transaction from 546E because of the non-fiduciary ministerial role played by Western Alliance Bank, but at a minimum, the fact that that language is in our agreements creates a fact issue as to what the role of Western Alliance Bank was. We think the better reading of Section 10122 is that agent there has to mean something more than someone playing a purely ministerial role.

The Second Circuit acknowledged that in Nine West, and if that's the case, then these contracts here certainly don't rise to the level of that definition. We also think that there's a fact issue around whether an agency relationship existed if the court isn't inclined to hold that there is no agency relationship simply based on the documents, which we think the court could do. There is at least a fact issue in that the designation of the entity as a paying agent. Certainly if you say that creates an agency relationship, there's contra evidence in the agreement itself that they're not an agent with this non-phidivision. judiciary, purely ministerial language, such that the agency relationship is itself a fact issue. You know, the only circuit that's decided that so far is the Second Circuit, and they have these two cases, which, as I say, have language in them supporting our position. Another interesting point on this which we referenced in our opposition brief, but I think is important,

is that the Solicitor General in the cert petition, in the cert briefing for Tribune, said the United States does not support the Second Circuit's reading here, which is obviously, when you think about it, applied in the extreme way that the defendants are advocating here would bring all kinds of transactions within the 546 E-safe Harbor and really frustrate the purposes of bankruptcy simply because of financial institution happened to be the entity that collected shares

from the selling shareholders and distributed the cash to them. And we really think that's not appropriate. Moving then to the sub-examination, subsequent transferee good faith argument I've explained our position on subsequent transferee we don't think that the complaint alleges that any of the defendants were subsequent transferees we think they were initial transferees but regardless that defense requires good faith and that's an affirmative defense under section whether under section 546 or 550B and that's explained in the made-off case

which we think is important on this issue 12th 4th particularly at 196 that's second circuit 2021 The defendants concede that our position on this, that good faith is an affirmative defense, not appropriate for motion to dismiss, is actually the majority view. They can see that it's a little bit more than that. As explained in the Madoff case, every circuit that's ruled on the issue has said this. The defendants rely heavily on dicta in a footnote from the Third Circuit in the Bresman case, which just says it's not at all clear to us that the language of 550B places the

burden of showing value of faith and lack of knowledge on the transferee as a defense. But it didn't decide that issue and it has not decided that issue. So they just said we don't know and it wasn't really up for decision in that case and they didn't decide it. But every circuit that has considered it has decided it our way, which again is explained all those circuits are explained in the Madoff case. On the initial transferring point, I just want to point out that the defendants seem to concede that if in fact the money came from FtX.com which is their position that

the defendants or the plaintiffs in between are essentially rendered near conduits which again would then make them initial transferees in any event I think that's an important concession at least that's the consequence of their argument but finally on this issue of subsequent transferring in good faith in particular again this is a fact issue and can't be resolved at this stage we think even if we have the burden to plead good faith or lack of good faith on the part of the defendants which we don't have that we have done so and I can run through those allegations very briefly the complaint at paragraph 43 alleges that an embed employee wrote that embed quote can't really take any accounts and that giles the founder who who got over $150 million from this transaction quote has to basically lie to get the deals he gets end quote that was a high-ranking embed employee who wrote that in an internal embed email we cite that at paragraph 43 of the complaint again a shareholder representative wrote that they had never seen so much of this deal go so

quote sorry quote never seen so much of a deal this size go to a founder just unusual proportions referring in particular to this fifty five million dollar retention payment that mr giles received for working for 16 weeks that's at paragraph 46 also at paragraph 46 that shareholder rep wrote that that to Mr. Giles, that he hoped that Giles was getting paid in cash. Hopefully there's limited risk to cash exchanging hands, as the quote. And then at paragraph 47, Mr. Giles himself asked whether his unusually large payment would be public and said, quote, hopefully people don't read it in too much detail, end quote.

So we think there's a lot of allegations in the complaint that even if we had the burden to prove lack of good faith, we've done so. But again, I don't think we have that burden, and it's a fact issue. Finally, on defendant's reasonably equivalent value arguments, again, on unconstructive fraud, the complaint more than adequately pleased

that the plaintiffs did not receive reasonably equivalent value. At paragraph 41, the complaint alleges that Embed's platform was riddled with, quote, many bugs, and quote, issues with tech. At 42 to 43, the complaint alleges that Embedd's platform could not handle any new accounts. At paragraph 44, the complaint alleges that the plaintiffs paid over 200,

million dollars for a company with quote total assets of approximately 37 million and a mere $25,000 in net revenue unquote at 45 to 46 the complaint alleges that mr. Giles received a 55 million dollar retention payment for only 16 weeks of employment and then at paragraphs 60 and 62 the complaint alleges that the highest post-petition auction bid as part of the bid procedures authorized by this court was from mr. Giles himself the founder of the company for $1 million, less than 1% of what he personally had received for selling the company a few months earlier.

The defendants argue very strenuously that the court should disregard this post-petition auction, which is essentially an evidentiary argument. I mean, they're basically saying it's irrelevant to the value issue. That's an evidentiary argument for later. On a motion to dismiss, the court certainly does not need to ignore these allegations, which

we believe give rise to a plausible inference that the plaintiff's overpaid for embed. So we think reasonably equivalent value here has clearly been pled. A lack of reasonably equivalent value has been pled. And again, it's a fact-specific issue, not suitable for motion to dismiss. On the retention payment obligations,

the retention obligations here provide that West Realm Shires has the obligation to cause Mbed, or if applicable, another member of the FTX group to pay or cause to be paid to employee the retention incentive payment. That language was in the slides that Mr. Wu went through. The obligation to make those payments just under that plain language clearly rests with embed or sorry with WRS itself and not with embed. WRS is obligated to cause embed or another member of the FTX group to make the payment.

So it's hard to imagine a contract claim against embed there where WRS is obligated to cause MBED or another member of the FTX group to make the payment. So it's hard to imagine a contract claim against MED there where WRS is. is not a defendant we think there's clearly an obligation there on WRS that can be avoided here as to mr. Giles retention payment the bankruptcy code defines debt broadly to include contingent claims the defendants criticize us for relying a lot on the Enron decision we think the Enron decision has not really been overruled we think that the claim that has been overruled is overstated the Tribune case that the defendant cite for that purpose actually didn't even mention

mention the Enron case at all. And the Tribune case references a contractual success fee under an LBO, not a retention payment, like at issue in Enron, and is at issue here. So we think that that reasoning is still very good reasoning. We don't think there's anything in the law here that applies that's binding here on this court that contradicts that. And finally, Your Honor, if the court is inclined

to disclose of any of the claims on this motion, believe that that plaintiffs here should be given leave to amend we think we've you know done enough here to survive a motion to dismiss but if the court is inclined to dismiss any claims we'd ask that it be without prejudice and that would be granted leave to amend and we explained some of the basis for that in our brief which way I won't go through again thank you your honor thank you your honor I just want to address a couple points on the no enforceable interest argument Mr. DeKamp mentioned the FBI Windown case, but the distinguishing feature of all the cases

that they cite is that none of the commingling cases involve stolen funds, admittedly stolen funds. And the difference is when funds are admittedly stolen, title does not go to the entity that stole the funds, and that's the distinguishing feature. Would you agree with Mr. DeCamp that the complaint does not say that all of the funds came from FTX and were stolen from FTF? Well, we, that's how we read it, but I agree with him. It doesn't expressly say that some of the funds were from Alameda. It's really hard to tell, to be honest.

When you read the complaint, all the allegations of fraud, it's all about Alameda taking this appropriating from FTX.com. But don't I have to on a motion to dismiss, construe everything in their favor? Correct? Well, but I think when you read the complaint as a whole, it's really hard to see that. If they want to expressly allege that, then they should do so. That's not very hard. They could expressly allege that, but it's nowhere expressly alleged in the complaint. Mr. Camp also raised the concept that will look the,

look the all these FTX entities they were all controlled by the FTX insiders and so really you know who cares about enforceable interests but but that's that the that the different entities had the FTX insiders above that's not sufficient to give them join ownership of each other's assets and that requires substantive consolidation it's an argument that they made their briefs but mr. Camp didn't really try to defend here because there is no there is no at this point there has been no substantive consolidation we don't know if there ever will be and they haven't pled facts in their complaint to support

the extraordinary relief of substantive consolidation to want to address one concept that maybe mr. lawford was going to address mr. mr. Kent said that the purpose of this grand fraud was to ensnare new new investor victims well they never really explained how that could be when the purpose of acquiring embed was to expand FtX.us into lead investors invest in conventional securities as well. There are no allegations here that the FTX insiders were taking FTX.U.S. customer funds and misappropriating it. There are no allegations of that, so it doesn't really make sense. Now the sub-subservoir consequent transferee point, they really don't engage on how the allegations could show that the

transfer issue are a recoverable under 550A1. The complaint's own allegations show that that's not the case and that we address that in their opening. And they don't dispute that the allegations show that defendants gave value in the form of labor or equity. interests and that the FTF insiders concealed the fraud. Really all they dispute is good faith. But good faith is not about whether defendants thought they were getting a good or bad deal. It's about whether they knew or believed that defendants were bad actors and there's no evidence that or were nothing alleged that showing the defendants knew anything about the FTF's

insider fraud. that email about from the executive at the defendants who said that Mr. Giles had to be lying in order to get the deals that he's getting? Well, as you won't be surprised, it's taking things out of context, but even accepting that allegation, that doesn't show, that would, that doesn't show that he knew anything that the FTX insiders were doing anything wrong. At most, that would suggest that he wanted to conceal something from, from, from, you know, that from the FTAX insiders as opposed to knowing or being for hoots with them.

I think goes to the question of reasonably equivalent value. Were they getting reasonably equivalent value of Mr. Giles lying about the value of the company? But reasonably equivalent value, I think, is not a part of 550B1. It's not... I agree. I'm jumping around on you. Okay.

Fair enough. Otherwise, Your Honor, I think just on Mr. Giles' retention payment, I think it's really It's really as simple as they rely on Enron and we believe Enron has been basically superseded by Tribune and the Piazza case we cite acknowledges as much. And so let me turn it over to Mr. Lawford. Thank you. Thank you, Your Honor, Greg Lauerfrey again from Paul Weiss for the other and-bed shareholder defendants of the super duper quick.

On the question of actual fraud, I didn't hear any response to the showing we made about the absence of all the badges of fraud that we pointed out, so I think those are now undisputed. On the question of actual or intentional fraud, there are still all these references to grant projects and loans and financial misdeeds, but none of that, and we didn't hear anything to the contrary just now in Mr. DeCamp's recitation, has anything to do with Embed in particular. And in addition, all of the fraudulent or alleged fraudulent activity that the plaintiffs, and now Mr. DeKamp have referred to, concerns FTX, not WRS, which is the entity that made the payment that is being challenged here.

So I'm not sure what the point of that discussion was. On the subject of the safe harbor, I heard four arguments, I think, or four points that I want to raise. There was, again, renewed reliance on the fiduciary. waiver. I don't understand why that is being advanced to the court. It's not an honest argument with all due respect. There is no question under the case law and under common law principles that those are two different concepts. I'm not going to say that they're completely unrelated, but one is not a precondition to the other. And the absence of one of the negation of one does not equal the negation of the other. There was also second point, a reference to the fact

that the activities that Western Alliance Bank was directed to undertake would be, quote, ministerial in nature. My answer to that is, so what? Agents very often undertake different sorts of roles and responsibilities, whether they're significant or important or ministerial is irrelevant to the question of whether there is an agency relationship. There is no doubt that based on the allegations and the complaint and the documents incorporated, that under the paying agent agreement, consistent with Nine West and Tribune, which are not distinguishable in any relevant respect on that subject, that Western Alliance Bank was an agent of WRS and the shareholder defendant at MBET. The third argument, or third point that I heard, was, I think, somewhat new, because I don't think it's pled in the

complaint that seemed to emerge for the first time in the opposition brief and then got some new airtime just now, this notion that Western Alliance Bank was – I'm sorry, that WRS was a mere converse That is not alleged in the complaint. And in fact, if you look at Third Circuit case law on that subject, in order to show that that defense or that principle applies here, the plaintiffs would have to demonstrate a lack of dominion and control over the transfer because the payment simply passed through the intermediaries or the conduit's hands and had no power to redirect the funds to its own use. That's obviously not what happened here at all. WRS had full dominion and control over what it was doing. It was a party to the payment agent agreement, and it is the entity that directed Western Alliance Bank

to distribute the merger consideration and to take the shares from the MBedged shareholders and to give them back to WRS. And then finally, there was a long discussion about apparently how a decision by I think eight judges in New York, three judges at the Second Circuit and Tribune, three more in nine West, and the two district court judges who decided those decisions or who ruled in those cases at the district court level were all wrong, all very experienced practitioners in

securities law and bankruptcy matters, and they all just got it wrong. The facts of those cases are on all fours with the facts here, including the relevant agreements. And I should also mention that both of those decisions post-date the merit decision by the Supreme Court. The Second Circuit in the Tribune decision actually said explicitly that a decision was not in conflict, the merit decision. And finally, the Supreme Court was petitioned for Sershi-Irari in the Tribune matter. declined to take up the case, notwithstanding the plaintiff's characterization of that decision here. So for all these reasons, we think that the safe harbor still applies, bars these claims.

And on the question of leave to amend, the theory that the plaintiffs have asserted in their complaint is factual in nature. And in order for them to overcome the impediments that we've identified here, they would have to disclaim those factual allegations. that is a judicial document. I believe that they should be bound by it at this point. I understand that there's case law to the effect that if a plaintiff wants to abandon that factual allegations and come up with some new factual theory that may be their right, but I'm not sure how they could possibly do that here, given the theory they've advanced. And I'll also point out that at least at this point in time,

the plaintiffs have not explained to the court or to us what new facts or theories or allegations they would advance in order to save their claims from being dismissed. Thank you very much. Thank you. All right. Your Honor, I was just going to ask if I could briefly address a couple of those points. Well, I think we finished the argument. I don't want to get into a big back and forth all afternoon.

So I'm going to obviously take the matter under advisement. I will issue a ruling in due course, but I understand the parties are going to be mediating this matter. Is that correct? That is correct, Your Honor. So I don't want to spend my time working on this if the matter is going to get resolved in mediation When what is the schedule look like? How is how is this going to go forward? We've prepared a draft order your honor

Which has not yet been signed or submitted But I believe we were planning to have a mediation session by maybe the second week of April somewhere around there. I'm not sure of the exact date yet or whether that will change Have you selected a mediator? yet judge Shelley Chapman your honor judge Chapman okay well she's very good so I would like to see how she can do with getting this thing resolved before I spend a lot of

time on this issue so I'll take it under advisement but I'm going to hold working on my ruling until I hear back from the parties on how mediation is going and as soon as you find out mediation is not going to resolve it let me know and then I'll start working on me I want to get closer to your one microphone. We're happy to make a more formal motion if needed, but it's expensive litigation for our clients.

And if we're going to hold on the motion, dismiss ruling pending mediation, we'd ask that the proceedings be stayed pending mediation so that the dollars on the attorney's fees don't keep running up. I think that's a reasonable request. So we'll stay discovery pending resolution of the see where we are on the mediation. Thank you, Your Honor. Anything else before we adjourn that? No, okay. Thank you all very much. Thank you.