Sullivan & Cromwell, after surviving a push to kick it off the FTX bankruptcy, stands to reap huge fees to sort out the finances of Sam Bankman-Fried’s fallen crypto empire.
The Wall Street law firm has more than 150 people working on the FTX case, including 30 partners with rates that exceed $2,000 per hour, according to a court filing. Associates are billing between $810 and $1,475 per hour.
Costs for lawyers and others working on the case will likely climb to the hundreds of millions of dollars before the bankruptcy is over. “To untangle the financials and then figure out what to do in the actual Chapter 11, there are going to be a lot of humans working,” said Nancy Rapoport, a University of Nevada Las Vegas law professor.
While Big Law bankruptcy practices aren’t as lucrative as mergers or private equity work, big cases can generate months or years of work and help pad profits—particularly during financial downturns. New York-based law firm Weil Gotshal pocketed nearly $500 million in the bankruptcy of Lehman Brothers in the wake of the 2008 financial crisis.
Kirkland & Ellis in 2019 was awarded roughly $56 million for 15 months of work on the Toys “R” Us bankruptcy. Eastman Kodak Co. paid $240 million in bills to advisers during its Chapter 11 reorganization, including more than $63 million that went to its main counsel, Sullivan & Cromwell.
“The professionals are going to do very well in FTX, just as the professionals have done very well in other big cases,” said Jonathan Lipson, a Temple University law professor. “That’s the way the system has developed.”
Sullivan & Cromwell has shown in court documents that FTX stands to rival the biggest cases in terms of the size of the undertaking for the firm.
More than 100 Sullivan & Cromwell lawyers in the bankruptcy, regulatory and litigation practices worked at least 10 hours on the FTX case in November alone. That included 25 partners whose rates are $2,165 an hour. John Ray, the restructuring expert tapped to take over for former CEO Bankman-Fried, is charging $1,300 per hour.
Sullivan & Cromwell declined to comment.
The firm said in a court declaration its proposed fees are in accordance with market rates by “other leading law firms” and represent a “discount” from the rate structures used in non-bankruptcy matters.
Sullivan & Cromwell has advised FTX since before it filed for Chapter 11 protection in November.
A former top FTX lawyer, as well as two creditors, argued the Sullivan & Cromwell should be thrown off the case because of its past ties to FTX, as well as its connection to FTX US general counsel Ryne Miller, a former Sullivan & Cromwell partner.
US Bankruptcy Judge John Dorsey, however, said in a Jan. 20 hearing that there is “no evidence of an actual conflict,” paving the way for the firm to keep its lead role.
Ray has said Sullivan & Cromwell and other advisers worked “nonstop” over the past two months to sort through the FTX wreckage. They so far found more than $5 billion in cash or crypto assets that may be used to repay creditors, the firm said in court Jan. 11.
Sullivan & Cromwell’s restructuring chairs, Andrew Dietderich and James Bromley, are leading the firm’s work on the case. Dietderich represented Eastman Kodak in Chapter 11 and helped Fiat purchase Chrysler in bankruptcy. Bromley led the Chapter 11 of Nortel Networks US.
The team includes Steve Peikin, who co-led the US Securities and Exchange Commission’s enforcement division, and James McDonald, who was enforcement director for the US Commodity Futures Trading Commission, both from 2017 to 2020.
At $2,165 per hour, Sullivan & Cromwell’s top partner rates in the FTX case are up 23% from the amount senior timekeepers used in auto-parts maker Garrett Motion’s 2020 Chapter 11.
“We’re seeing a faster rise in hourly rates than we have in the past,” said Lynn LoPucki, a University of Florida law professor. “And there is a rise in the number of professionals working on the cases.”
Legal industry rates rose roughly 40% from 2007 to 2020, according to Thomson Reuters data; US inflation rose by about 28% during that time.
Big firms are expected to raise rates by 8% this year, according to a November Wells Fargo Legal Specialty Group survey. That would be the highest rate hike on record, according to the report.
Rapoport, who has worked as a fee examiner in bankruptcy cases, said the high rates become suspect only when cases are poorly managed.
“The rate will give you sticker shock just because it’s high, but if the high billers are doing things that people of their expertise should be doing,” then fees are reasonable, she said.
Judge Dorsey has said that in the FTX case he will likely appoint a fee examiner, who will weigh in on the fees.
The monitors, which are often called in for major bankruptcies, review periodic fee applications to ensure they are “reasonable, actual, and necessary,” according to US bankruptcy guidelines.
Lipson said how Sullivan & Cromwell is ultimately judged for their work on the FTX case may hinge on how much money the firm and other advisers can recover for creditors rather than the fees it charges.
“The important question is never are the lawyers charging a lot; it’s is it worth it?” Lipson said. “If they can recover a lot of money, then it’s probably worth it.”
— With reporting by James Nani.
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