Bloomberg Law
Jan. 18, 2023, 8:53 PM

FTX Fights Sullivan & Cromwell Removal Attempt From Bankruptcy

Justin Wise
Justin Wise
Reporter

Sullivan & Cromwell’s removal or limitation as bankruptcy counsel for FTX would “severely, if not irreparably” harm customers and creditors, the cryptocurrency exchange’s CEO John Ray told a judge.

An “army” led by the firm’s lawyers have worked under Ray’s supervision around the clock for the past two-plus months, he told Delaware Bankruptcy Court Judge John T. Dorsey in a filing. The work has stopped assets from being depleted and aided federal investigations, he said.

“The advisors are not the villains,” Ray said. “This is not the time to distract and burden the debtors.”

FTX in the Tuesday filings is defending Sullivan & Cromwell’s role as its lead bankruptcy counsel after four US senators questioned the firm’s work for the crypto exchange prior to its implosion. The US Trustee has also raised concerns about whether the firm’s disclosures have been sufficient.

Sullivan & Cromwell has advised FTX since the exchange first initiated Chapter 11 proceedings in November, listing assets and liabilities of at least $10 billion. Dorsey is scheduled to weigh in on FTX’s application to keep the firm as its main bankruptcy counsel in a Friday hearing.

In a court filing on behalf of FTX, the firm said that objectors are seeking to blame advisers while ignoring the benefit they “have brought, and continue to bring, to the debtors and their stakeholders.”

Sullivan Concerns

Sullivan & Cromwell in December disclosed that prior to the bankruptcy, it had earned about $8.5 million for work on matters tied to the exchange since 2021. Some former firm attorneys also now occupy top in-house roles for certain FTX entities, including FTX’s US general counsel, Ryne Miller.

The US Trustee, Andrew R. Vara, who acts as a watchdog in corporate bankruptcy cases, said in a Jan. 13 motion that the firm’s disclosures relating to the FTX ties were “wholly insufficient” to earn approval as a disinterested party from the court. Vara also claimed that the firm’s connection to Miller and its past work for the exchange should prevent the firm from leading any investigation.

US Sen. John Hickenlooper (D-Col.) and three colleagues told the court in a letter this month that Sullivan & Cromwell is wrong for its role because the firm’s prior work raised impartiality concerns. Dorsey said the letter won’t affect his decisions.

FTX creditor Warren Winter has also raised objections in court over what his counsel has called “extensive” conflicts. But the committee of unsecured creditors has said they do not share the voiced concerns regarding the law firm.

Firm Responds

Sullivan & Cromwell argued in its filing that it is a disinterested party under the bankruptcy code and that some of the questions regarding its ties to certain FTX officials and past legal work for the exchange are “mere speculation.”

“The mere fact that a law firm provided pre-petition services to a debtor does not render the firm an interested person,” Sullivan & Cromwell argued. “To disqualify a law firm, an objector must point to an actual conflict.”

The firm said it has established conflict checks that will separate it from any investigation tied to itself or former firm lawyers now employed at FTX entities.

Sullivan & Cromwell also said it was in regular communication with the US Trustee regarding further disclosures, some of which were made public in its new filings.

Sullivan Work

Lead bankruptcy partner Andrew Dietderich wrote in a declaration Tuesday that the firm worked on 20 FTX-related matters prior to being appointed as its bankruptcy counsel, including three matters that resulted in more than $3 million in fees.

Dietderich, however, said the firm never considered FTX a “regular client” and that Sullivan & Cromwell was among several Big Law firms the crypto exchange used.

He said FTX lawyers contacted him Nov. 8 amid rumors that the exchange had stopped customer withdrawals. Sullivan & Cromwell later began preparing FTX International for possible Chapter 11 and advised its lawyers about appointing a chief restructuring officer.

The firm recommended multiple candidates, including Ray, who would ultimately take over FTX before it filed for Chapter 11 and then appoint Sullivan & Cromwell as its bankruptcy counsel.

Bankman-Fried

Sam Bankman-Fried, the former FTX CEO who is now facing criminal fraud charges for allegedly misusing billions of dollars, has claimed that Sullivan & Cromwell applied pressure to appoint Ray and file for Chapter 11.

Dietderich in his filing denied the accusation. Bankman-Fried agreed to appoint Ray after consulting with his father, the Stanford law professor Joseph Bankman, and three personal lawyers, he said.

The firm previously acknowledged receiving a $12 million retainer from an FTX-controlled company to handle the early phase of the Chapter 11 bankruptcy proceedings.

Its lawyers are working alongside Quinn Emanuel, which is representing FTX and its board of directors in a litigation capacity, and Landis Roth & Cobb, whose lawyers are working in Delaware as local counsel.

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

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