Simply earlier than FTX collapsed in November, one in all its exterior legal professionals on the legislation agency Sullivan & Cromwell emailed a colleague at one other agency, insisting that the cryptocurrency alternate’s funds have been steady.
Rumors of FTX’s demise have been “silliness,” the lawyer, Andrew Dietderich, wrote. “FTX is rock strong, doesn’t use buyer funds or take credit score threat in any respect,” he stated.
4 days later, FTX filed for chapter. Mr. Dietderich shortly organized for Sam Bankman-Fried, the alternate’s founder, to step down so {that a} new chief government, John Jay Ray III, a specialist in company turnarounds, could lead on the corporate. When Mr. Ray wanted legal professionals to handle the chapter, a profitable project, he asked a judge to appoint the identical ones who had helped get him the job: Sullivan & Cromwell.
Now, with Mr. Bankman-Fried set to go on trial subsequent month on fraud fees stemming from FTX’s failure, Sullivan & Cromwell’s tangled historical past with the alternate is drawing scrutiny — particularly from Mr. Bankman-Fried’s legal professionals and household.
For months, Mr. Bankman-Fried has attacked Sullivan & Cromwell in court docket papers and on social media, arguing that the agency’s legal professionals set him up as the autumn man for FTX’s implosion whereas downplaying their very own involvement with the alternate. The dispute grew to become much more private this week when FTX sued Mr. Bankman-Fried’s dad and mom, looking for to claw again hundreds of thousands of {dollars} and claiming the alternate had operated like a “household enterprise.”
Criticism of Sullivan & Cromwell has change into extra widespread not too long ago, because the agency has racked up over $100 million in authorized charges from FTX’s chapter. This summer season, its legal professionals clashed with representatives for FTX’s hundreds of thousands of disgruntled collectors over the agency’s authorized technique and the tempo of its efforts to get well billions in lacking property.
“They have been concerned earlier than the chapter,” stated Sunil Kavuri, an FTX creditor who misplaced greater than $2 million within the collapse. “They need to’ve been conscious of what was occurring.”
The dispute over Sullivan & Cromwell’s relationship with FTX exhibits the vary of highly effective establishments that have been keen to assist Mr. Bankman-Fried throughout his speedy rise, at the same time as he resisted primary due diligence and eschewed conventional company governance. And it provides a preview of a battle that will unfold at Mr. Bankman-Fried’s trial in Manhattan, the place he’s anticipated to shift among the blame for FTX’s chapter to Sullivan & Cromwell and a second legislation agency that suggested him, Fenwick & West.
In court docket filings, Mr. Bankman-Fried’s legal professionals have recommended that they could elevate a so-called advice of counsel defense to argue that those firms accredited lots of FTX’s actions. Prosecutors have argued that the decide overseeing the trial mustn’t allow Mr. Bankman-Fried in charge his legal professionals, as a result of the founder typically lied about how his enterprise was utilizing its cash. In addition they stated he should have to disclose whether or not he relied on authorized recommendation from his dad and mom, who’re longtime Stanford legislation professors.
A spokesman for FTX stated Mr. Bankman-Fried’s claims have been “a biased story line” meant to unfairly blame the professionals attempting to get well cash. A consultant for Sullivan & Cromwell declined to remark. In court docket, the legislation agency has stated that FTX was by no means a “common shopper,” and that the agency had put in place procedures to protect in opposition to conflicts of curiosity through the chapter.
A spokesman for Mr. Bankman-Fried declined to remark. The FTX founder has pleaded not responsible to fees that he orchestrated a scheme to funnel billions in buyer cash into enterprise investments, actual property purchases and political donations. His trial is scheduled to start on Oct. 3.
One of many oldest legislation companies in New York, Sullivan & Cromwell started dealing with authorized issues for FTX in summer season 2021 after one in all its companions, Ryne Miller, was employed as normal counsel of FTX.US, the alternate’s American arm.
Over the following 12 months and a half, the agency labored on 20 authorized issues for FTX and its sister hedge fund, Alameda Analysis, court records show, together with discussions with federal regulators on the Commodity Futures Buying and selling Fee. Sullivan & Cromwell acquired a complete of about $8.5 million for the work.
Mr. Bankman-Fried has stated that past these particular issues, he worked out of Sullivan & Cromwell’s workplaces in New York whereas visiting from FTX’s Bahamas headquarters. And when FTX began teetering in November, Mr. Dietderich emailed a lawyer engaged on the chapter of Voyager Digital, a crypto agency that FTX was attempting to accumulate, to guarantee him that the alternate “doesn’t lend” its clients’ cash.
It turned out he was unsuitable. As FTX plunged into disaster the following day, Mr. Miller sought a $4 million retainer for Sullivan & Cromwell so the agency may work on a attainable chapter submitting, in line with messages he despatched on the time. Quickly, Sullivan & Cromwell legal professionals alerted the authorities to attainable prison malfeasance at FTX, whereas Mr. Dietderich inspired Mr. Bankman-Fried to let Mr. Ray take over the alternate.
In essence, Sullivan & Cromwell labored each side of the disaster. When FTX was a darling of the company and political elite, the agency’s legal professionals helped Mr. Bankman-Fried navigate Washington as he pushed to loosen laws. After FTX failed, Sullivan & Cromwell labored carefully with federal prosectors, supplying them with key company data.
In January, the U.S. trustee assigned to FTX’s chapter raised the prospect of eradicating Sullivan & Cromwell from the case, citing its failure to reveal all of its previous work for FTX. Across the identical time, 4 U.S. senators launched a letter arguing that Sullivan & Cromwell had a conflict of interest as a result of the agency would possibly bear some duty for FTX’s failure. However the trustee backed down after the agency made a extra detailed disclosure, and a decide allowed the legal professionals to proceed overseeing the chapter, saying he noticed “no proof of any precise battle.”
Mr. Bankman-Fried has remained fixated on Sullivan & Cromwell. His legal professionals have argued that the agency is offering proof to the prosecutors that displays poorly on Mr. Bankman-Fried, whereas withholding materials that might assist the protection. Prosecutors have denied that declare, writing in court papers that FTX and its legal professionals “have been responding to the federal government’s doc requests voluntarily.”
After Mr. Bankman-Fried’s arrest, his mom, Barbara Fried, contacted one in all her Stanford colleagues, the authorized ethics scholar Invoice Simon, and requested him to guage Sullivan & Cromwell’s conduct within the chapter. Mr. Simon, a household good friend, spent about 9 hours discussing the case with Mr. Bankman-Fried in June, he stated in an interview, earlier than writing an unpublished article criticizing the agency, which he shared with The New York Occasions.
“It’s laborious to see how the legal professionals may have completed their jobs through the interval during which they represented FTX,” he wrote, with out familiarizing themselves with practices that “at the moment are condemned as irresponsible or worse.”
Rebecca Roiphe, a former prosecutor and a professor at New York Regulation College, stated it was honest to boost questions on potential conflicts of curiosity when a legislation agency represented an organization each earlier than and through a authorities investigation that may contain associated work.
“However this isn’t unusual and doesn’t essentially show wrongdoing,” she stated, including that Mr. Simon had requested her to overview his article.
On the identical time that Sullivan & Cromwell has clashed with Mr. Bankman-Fried, the agency has confronted pushback from FTX’s collectors. They’ve complained that the legislation agency has failed to maximise proceeds from the sale of the alternate’s property. To this point, the legal professionals say they’ve recovered about $7 billion, but it surely’s unclear how a lot of that might be returned to clients, who’ve filed $16 billion in claims, court docket filings present.
The dispute spilled into public in July when a gaggle appointed to symbolize FTX’s collectors within the case said Sullivan & Cromwell had ignored its recommendations about tips on how to resolve the chapter. The legislation agency responded that some creditors were engaging in “unprofessional conduct” — the legal professionals had been left perturbed after a gathering during which at the least one creditor used a four-letter phrase to specific frustration, two individuals conversant in the alternate stated.
None of these conflicts have stemmed the movement of funds to Sullivan & Cromwell, which has greater than 200 legal professionals, paralegals and help workers members engaged on FTX’s chapter, essentially the most senior of whom cost $2,165 an hour.
In its most up-to-date month-to-month invoice, Sullivan & Cromwell stated it was owed greater than $10 million for its work on the chapter, together with over 100 fees for conferences, calls or correspondence with the federal prosecutors pursuing Mr. Bankman-Fried.
