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FTX Bankruptcy Law Firm Is Wrong Fit for Role, Senators Say (1)

Jan. 10, 2023, 9:00 PMUpdated: Jan. 10, 2023, 10:37 PM

FTX lead bankruptcy counsel Sullivan & Cromwell is wrong for its role because the firm’s prior work for the crypto exchange raises impartiality concerns, four US senators said.

“The firm is simply not in a position to uncover the information needed to ensure confidence in any investigation or findings,” Sen. John Hickenlooper (D-Col.) and three colleagues wrote.

They questioned whether Sullivan & Cromwell could effectively investigate current and former partners who were central in FTX’s conduct. “Given their longstanding legal work for FTX, they may well bear a measure of responsibility for the damage wrecked on the company’s victims,” the senators said.

Sullivan & Cromwell has said in court filings that it earned about $8.5 million in the 16 months before FTX’s bankruptcy filing for legal work primarily relating to transactions and regulatory inquiries.

Bankruptcy Judge John Dorsey should support a U.S. Trustee’s motion for an independent examiner to review activities that led to FTX’s collapse, the senators said in their Monday letter to the judge, also signed by Thom Tillis (R-NC), Elizabeth Warren (D-Mass.), and Cynthia Lummis (R-Wyo.).

Sullivan & Cromwell said in response that it has never served as primary outside counsel to any FTX entity.

“The firm had a limited and largely transactional relationship with FTX and certain affiliates prior to the bankruptcy,” the firm said in a statement. A “broad team of sophisticated professionals, including conflicts counsel,” is advising FTX in bankruptcy, the statement said.

The senators’ missive comes just days after an FTX creditor made a similar push for the firm to be kicked off the matter due to perceived conflicts relating to its past work.

Warren Winter, a creditor who allegedly lost hundreds of thousands of dollars in FTX’s collapse, argued in a Jan. 4 motion that Sullivan & Cromwell’s conflicts were “obvious and extensive.”

Punchbowl News first reported on the senators’ letter.

FTX Ties

FTX and more than a hundred of its affiliates filed for bankruptcy Nov. 11, listing at least $10 billion in assets and liabilities. Former FTX leader Sam Bankman-Fried is facing criminal charges, including for allegedly misusing billions of dollars in customer assets.

Sullivan & Cromwell has taken a lead advisory role in the proceedings. Andrew Dietderich and James Bromley, heads of the firm’s restructuring pratice, have led a team including partners Brian Glueckstein and Steven Peikin, a former Securities and Exchange Commission director of enforcement.

Prior to being arrested on eight criminal charges, Bankman-Fried planned to testify to Congress that the firm applied “extreme pressure” to file for Chapter 11, according to a leaked transcript of prepared comments.

Sullivan & Cromwell was behind restructuring expert John Ray, now in charge at FTX, running the “Chapter 11 team,” Bankman-Fried planned to say, according to the transcript.

The firm, whose ex-partner Ryne Miller serves as general counsel of FTX US, has acknowledged receiving a $12 million retainer from an FTX-controlled company shortly before the bankruptcy filing, according to court records.

The disclosure came in Sullivan & Cromwell’s Dec. 21 application for an order authorizing its role as FTX’s bankruptcy counsel moving forward. The request, signed by Dietderich, also noted its prior outside legal work for FTX on a “limited number of matters.”

The firm’s lawyers last year advised Alameda Research, the sister trading firm of FTX, in bankruptcy proceedings involving crypto brokerage Voyager Digital Ltd.

Sullivan & Cromwell also served as lead counsel for FTX US in its successful bid in September for Voyager’s assets, according to a statement on the auction.

Dietderich said in the December court filing that the firm qualifies under the US Bankruptcy Code as a “disinterested person,” meaning it has no interest adverse to the estate or class of creditors and other parties.

The senators said the firm made its disinterested person claim “somewhat shockingly.” There are “significant questions about the firm’s involvement,” including whether Sullivan & Cromwell suspected fraud at FTX, they said.

(Adds Sullivan & Cromwell response in sixth, seventh paragraphs.)

To contact the reporter on this story: Justin Wise at jwise@bloombergindustry.com

To contact the editors responsible for this story: Chris Opfer at copfer@bloomberglaw.com; John Hughes at jhughes@bloombergindustry.com