As if the fallen crypto exchange FTX’s bankruptcy proceedings isn’t enough of a legal kerfuffle, the law firm representing the company is now aiming to defend being retained as counsel after formal objections have been lodged against their undisclosed conflict of interest.
The bankruptcy watchdog of the U.S. Department of Justice has requested Judge John Dorsey of the Bankruptcy Court in Delaware, to refuse FTX hiring Sullivan & Cromwell (S&C), contending that the prestigious New York law firm had not provided enough information about its previous connections to FTX, including the fact that Ryne Miller, FTX’s US general counsel, is a former partner at the firm.
FTX founder Sam Bankman-Fried, even before his arrest, has been maintaining that he was forced to file the firm’s bakruptcy, claiming doing so was his “biggest single f*ckup” and believing “everything would be [around 70%] fixed right now” if he hadn’t done it.
“We likely could have raised significant funding; potential interest in billions of dollars of funding came in roughly eight minutes after I signed the Chapter 11 docs,” Bankman-Fried claimed in his letter to FTX staff back in November.
Notably, Bankman-Fried himself did not sign the filing for Chapter 11 bankruptcy – John J. Ray III signed the documents, in the capacity of Chief Executive Officer.
Most recently, Bankman-Fried wrote in a Substack post that S&C and Miller “were the primary parties strong-arming and threatening me into naming the candidate they themselves chose as CEO of FTX,” and that the new CEO, John J. Ray III, “then filed for Chapter 11 and chose S&C as counsel to the debtor entities.”
The FTX founder’s criticisms of the law firm led to one customer filing an objection to S&C as the company’s lawyer in the bankruptcy proceedings. Warren Winter, who claims to have several hundred thousand dollars of assets trapped in FTX International accounts, formalized the objection, calling the appointment of S&C “the most flagrant attempt by a fox to guard a henhouse in recent memory.”
“Sullivan & Cromwell is not only an inappropriate candidate for appointment as the FTX Group’s bankruptcy counsel—it is a target for investigation with its own potential liability,” said the legal complaint. The filing cited the testimony Bankman-Fried was scheduled to make to Congress but was prevented from doing so by his arrest, according to which S&C was FTX’s primary legal counsel.
In Sullivan & Cromwell’s defense, they said that the court should not disqualify the firm just because it assisted FTX with certain pre-bankruptcy work. An S&C representative said that the company’s interactions with FTX before the bankruptcy were “limited and largely transactional” and it never functioned as the primary outside counsel for any FTX entities.
The crypto exchange asserted in court documents filed this week that it relies on S&C for critical tasks like protecting client assets and exchanging information with US prosecutors and authorities. FTX added that forcing it to find new counsel would obstruct efforts to clean up the mess Bankman-Fried left behind.
According to legal experts, S&C might earn hundreds of millions of dollars in fees by acting as FTX’s lead bankruptcy attorney. FTX had to ask the bankruptcy court for approval in order to pay top S&C attorneys more than $2,000 per hour.
Bankman-Fried is being charged by US authorities regarding his role in FTX’s fraudulent scheme and consequent implosion to bankruptcy. The former FTX CEO, who pled not guilty to the charges, wrote in his supposed testimony that “no cash were stolen” from FTX in spite of former Alameda Research CEO Caroline Ellison’s guilty plea that she collaborated with him to commit fraud and money laundering.
Miller lobbying S&C
What seemed to be just Bankman-Fried’s soliloquy has been given further credence by FTX’s former in-house lawyer Daniel Friedberg. The latter filed a declaration of support of Winter’s objection to retaining S&C as bankruptcy counsel.
Friedberg’s declaration enumerated claims mostly against Miller during his stint as the general counsel for FTX US. In one account, the former FTX top lawyer said Miller asked him if he could hire S&C–his former law firm–as outside counsel.
“Mr. Miller informed me that it was very important for him personally to channel a lot of business to S&C as he wanted to return there as a partner after his stint at the Debtors,” Friedberg’s declaration read. “This bothered me very much and I told him that his job was to only hire the best outside counsel for the job, and that his allegiance was now to the Debtors and not S&C.”
Friedberg also reiterated that FTX International, FTX US, and Alameda are three separate entities, with separate assets and operating out of separate servers.
“S&C represented all of these groups simultaneously without proper conflict waiver. S&C also represented [Bankman-Fried] and [former FTX engineering chief Nishad Singh] personally. The lawyers in this important bankruptcy proceeding should be independent and not have a history of representing all of the various groups and the principals at one time,” Friedberg added.
The lawyer, who was serving as FTX’s chief regulatory officer at the time, also relayed that he was told about the $8 billion deficit at FTX International on November 7, 2022. He said that while he was in FTX US’s offices in New York, he informed Miller about the deficit but the latter was already aware of the development as he was busy contacting “all the billionaires that he knew” to provide emergency financing to cover the customer deficit.
“I explained to Mr. Miller that he had to review his ethical obligations before continuing to represent FTX.US under such circumstances, and soliciting financing under the circumstances might conflict with his ethical duties. He dismissed my concerns and remained optimistic about helping Sam get future financing,” Friedberg said.
Friedberg then said he felt he would “be used to further additional fraud” if he stayed on so he resigned the next day.
“FTX US was not affected”
Days later, Miller and Friedberg got in a call discussing the potential bankruptcy of the crypto firm.
“On that call, I first informed Mr. Miller that we had been counseled by all our other law firms that the bankruptcy filings of FTX International Group and the Alameda Group should occur outside the United States, and likely in Bahamas or Europe,” said Friedberg, adding that this is because “of the unnecessary expense of the US bankruptcy system, the situs of the primary regulator, as well as the fact that creditors of the FTX International Group were outside the United States.”
However, Miller told him that the bankruptcy filings of FTX International, Alameda, and FTX US had to be in the United States “because otherwise S&C couldn’t do the job.”
Friedberg said he told Miller that FTX US should not file bankruptcy at all until it was certain that there were insufficient assets. He added that “the tech team checked the wallets and had told the FTX International general counsel at the time of the disclosure of the customer deficit that FTX US was not affected.”
“Mr. Miller stated that he needed to include FTX.US as part of the bankruptcy because FTX.US had the cash to pay S&C its retainer. Without this retainer from FTX.US, S&C wouldn’t file,” Friedberg explained.
Back in November after the deficit was discovered, Bankman-Fried explained in a Twitter thread delineating that FTX US is “fine” and “100% liquid” and all the concern is just about the “non-US exchange” FTX International.
Further, Friedberg also claimed that FTX have at least four significant claims against S&C arising from their past work and also related to the bankruptcy, adding that “these potential claims are sufficient to disqualify S&C from acting as a lawyer at all for the Debtors in this proceeding.”
Two of these claims are “filing for bankruptcy for FTX US when the group appears to have been solvent” and the “unexplainable decision to leave open withdrawals at FTX US for several days and not secure the crypto assets of the entities after filing bankruptcy.”
“If FTX US were insolvent, how could withdrawals been left open? How could the crypto of the Debtors not be secured upon filing the bankruptcy?” Friedberg said.
The former regulatory officer said that he would testify “competently to the facts set out in this declaration” if he’s called by the court.
Meanwhile, Bankman-Fried has been consistently criticizing S&C, most recently after the law firm claimed that there are “material shortfalls” in customer funds for both the international and the US-based exchanges. The former FTX CEO rebutted that the debtors failed to include FTX US’s bank accounts as an asset, thus making it look like the US subsidiary had a shortfall.
As Bankman-Fried explained, “their statement would merely be saying that full customer balances, including USD, were larger than digital wallet assets, excluding bank balances, and that the ‘shortfall’ might simply be customer balances that are fully backed by dollars in one of FTX US’s bank accounts—not a real shortfall at all.”
“FTX US was solvent when it was turned over to S&C, and almost certainly remains solvent today,” the founder reiterated.
Around December, Friedberg essentially admitted to FTX counterfeiting crypto in a call with Nugenesis, days before Bankman-Fried also admitted to the same in a Twitter space.
“They may have counterfeited the coin,” Friedberg said. “All we did is push a button through an exchange. We didn’t intend to do [fake coins] certainly… We have a new coin in our exchange account, we send it to you using the exchange account… Who knows, I don’t know, because that’s not on the blockchain.”
The FTX’s former in-house lawyer has reportedly helped US prosecutors in their investigation into the crypto firm’s demise, bolstering the government’s case against Bankman-Fried.
The court hearing Bankman-Fried’s case tentatively set the trial date as October 2, 2023, but said it may be moved “a day or so later or earlier.”
Information for this briefing was found via Reuters, Forbes, and the sources mentioned. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.