Just before FTX collapsed in November, one of its outside lawyers at the law firm Sullivan & Cromwell emailed A colleague from another firm stressed that the financial position of the cryptocurrency exchange is stable.
Rumors of FTX’s demise were “silly”, lawyer Andrew Dietderichs wrote. “FTX is rock solid, doesn’t use client funds or take any credit risk at all,” he said.
After four days, FTX filed for bankruptcy, Mr. Dietderichs immediately arranged for the exchange’s founder, Sam Bankman-Fried, to step down so that a new chief executive, John Jay Ray III, an expert in corporate turnarounds, could lead the company. When Mr. Ray needed lawyers to manage his bankruptcy, a lucrative task, He asked to appoint a judge The same ones who had helped him get the job: Sullivan and Cromwell.
Now, Mr Bankman-Fried will go on trial next month fraud allegations In the wake of the FTX failure, Sullivan & Cromwell’s tangled history with the exchange is becoming the subject of scrutiny – particularly from Mr. Bankman-Fried’s lawyers and family.
For months, Mr. Bankman-Fried has attacked Sullivan & Cromwell in court papers and on social media, arguing that the firm’s lawyers have blamed them for FTX’s implosion while downplaying its involvement with the exchange. . The dispute became even more personal this week when FTX Mr. Bankman-Fried’s parents suedIt is trying to get millions of dollars back and claims the exchange operated like a “family business.”
Criticism of Sullivan & Cromwell has become more widespread recently, as the company has lost more than $100 million. legal fees From the bankruptcy of FTX. This summer, its lawyers clashed with representatives of FTX’s millions of disgruntled creditors over the firm’s legal strategy and the pace of efforts to recover billions of missing assets.
“They were involved before the bankruptcy,” said Sunil Kavuri, an FTX creditor that lost more than $2 million in the collapse. “They should have known what was happening.”
The controversy over Sullivan and Cromwell’s relationship with FTX reflects the range of powerful institutions that were eager to help Mr. Bankman-Fried. its rapid growth, even though they opposed basic due diligence and abandoned traditional corporate governance. And it offers a preview of a conflict that could play out at Mr. Bankman-Fried’s trial in Manhattan, where he is expected to blame some of the blame for FTX’s bankruptcy on Sullivan & Cromwell and the other law firm that advised him. Gave it to Fenwick and West. ,
In court filings, Mr Bankman-Fried’s lawyers have suggested they may bring a so-called lawyer defense advice to debate that those firms Approved several actions of FTX. Prosecutors have argued that the judge overseeing the trial should not have allowed Mr. Bankman-Fried to defect to his lawyers, because the founder often lied about how his business was using its money. He also said must disclose Did he rely on the legal advice of his parents, longtime Stanford law professors?
An FTX spokesperson said Mr. Bankman-Fried’s claims were “a biased story” intended to unfairly blame professionals trying to recover money. A representative for Sullivan and Cromwell declined to comment. In court, the law firm has stated that FTX was never a “regular customer”, and that the firm was put in place Procedures for avoiding conflicts of interest during bankruptcy.
A spokesman for Mr Bankman-Fried declined to comment. The founder of FTX has pleaded not guilty to charges that he planned to spend billions of clients’ money on venture investments, real estate purchases and political donations. His trial is scheduled to begin on October 3.
Sullivan & Cromwell, one of New York’s oldest law firms, began handling legal matters for FTX in the summer of 2021, when one of its partners, Raine Miller, was appointed as General Counsel of the exchange’s US arm, FTX.US. was appointed.
Over the next year and a half, the firm worked on 20 legal cases for FTX and its affiliate hedge fund, Alameda Research. court records show, including discussions with federal regulators at the Commodity Futures Trading Commission. Sullivan and Cromwell received a total of approximately $8.5 million for the work.
Mr Bankman-Fried said that beyond those specific cases, he Work Outside the offices of Sullivan & Cromwell in New York during a tour from FTX’s Bahamas headquarters. And when FTX began declining in November, Mr. Dietderich emailed a lawyer working on the bankruptcy of Voyager Digital, a crypto firm that FTX was trying to acquire, to assure him that the exchange would Does not “lend” customers money.
It turns out he was wrong. As FTX plunged into crisis the next day, Mr. Miller demanded a $4 million retainer for Sullivan and Cromwell so the company could work on a possible bankruptcy filing, according to messages sent at the time. Soon, Sullivan & Cromwell’s lawyers alerted authorities to possible criminal wrongdoing at FTX, while Mr. Dietderich encouraged Mr. Bankman-Fried to put Mr. Ray in charge of the exchange.
In short, Sullivan and Cromwell worked on both sides of the crisis. when ftx was one darling of the corporate and political elite, the firm’s lawyers helped Mr. Bankman-Fried go to Washington as he pushed to loosen the rules. After FTX failed, Sullivan and Cromwell worked closely with federal prosecutors, providing them with key corporate records.
In January, American Trustee The case submitted for bankruptcy by FTX has raised the possibility of Sullivan and Cromwell being removed from the case, citing failure to disclose all of their past actions for FTX. Around the same time, four US senators issued a letter arguing that Sullivan and Cromwell there was a conflict of interest Because the company may bear some responsibility for the failure of FTX. But the trustees backed down after the firm provided more detailed disclosure and a judge allowed Attorneys said they continued to monitor the bankruptcy, saying they saw “no evidence of any real conflict.”
Mr Bankman-Fried focuses on Sullivan and Cromwell. His lawyers have argued that the firm is provide evidence To prosecutors who reflect poorly on Mr. Bankman-Fried, while withholding material that might help the defense. Prosecutors have denied that claim, write in court papers FTX and its lawyers are “voluntarily responding to the government’s document requests.”
Following Mr. Bankman-Fried’s arrest, his mother, barbara fried, contacted one of his Stanford colleagues, legal ethics scholar Bill Simon, and asked him to evaluate the conduct of Sullivan and Cromwell in the bankruptcy. Mr. Simon, a family friend, spent about nine hours discussing the case with Mr. Bankman-Fried in June, he said in an interview, before writing an unpublished article criticizing the firm, which he shared with The New York Times. did.
“It is hard to see how the lawyers would have done their job during the period in which they represented FTX,” he wrote, without being familiar with practices that “are now condemned as irresponsible or worse.” “
Rebecca Roippe, a former prosecutor and professor at New York Law School, said it is reasonable to raise questions about potential conflicts of interest when a law firm represents a company before and during a government investigation that may involve related actions.
“But it’s not unusual and it doesn’t necessarily mean it’s falsifiable,” he said, adding that Mr. Simon had asked him to review his article.
At the same time as Sullivan & Cromwell clashed with Mr. Bankman-Fried, the firm faced pushback from FTX’s creditors. He complained that the law firm had failed to maximize proceeds from the sale of the exchange’s assets. So far, lawyers say they have recovered about $7 billion, but it is unclear how much of that will be returned to clients who have filed $16 billion in claims, according to court filings. Let’s go.
The dispute became public in July when a group was appointed to represent FTX’s creditors in the case. Said Sullivan and Cromwell ignored its suggestions about how to resolve the bankruptcy. law firm replied that some creditors were involved The lawyers were upset — in “unprofessional conduct” — after a meeting in which at least one creditor used a four-letter word to express frustration, two people familiar with the exchange said.
None of these struggles have stopped the flow of payments to Sullivan & Cromwell, which has more than 200 lawyers, paralegals and support staff members working on FTX’s bankruptcy, the most senior of whom charge $2,165 an hour.
In its most recent monthly bill, Sullivan & Cromwell said it was owed more than $10 million for its work on the bankruptcy, including meetings, calls or correspondence with federal prosecutors pursuing Mr. Bankman-Fried. More than 100 charges were involved.