Four US Senators Question Sullivan & Cromwell’s Role in FTX Bankruptcy

https://www.ft.com/content/f760ae83-9802-4f12-a90b-c37773b1616c

Four US senators have questioned whether top Wall Street law firm Sullivan & Cromwell could properly investigate possible wrongdoing at FTX as its bankruptcy counsel given its past work for the cryptocurrency exchange. The bipartisan group of senators said Sullivan & Cromwell’s legal work for FTX before it filed for bankruptcy meant it should not now be entrusted with scrutinising the events leading up to the collapse of Sam Bankman-Fried’s crypto empire, which includes accusations of fraud and misappropriation of customer money.

Two Democratic senators, John Hickenlooper and Elizabeth Warren, along with Republicans Thom Tillis and Cynthia Lummis, wrote in the letter dated January 9 that Sullivan & Cromwell “is simply not in a position to uncover the information needed to ensure confidence in any investigation or findings".

The US bankruptcy court in Delaware will this month consider whether to allow Sullivan & Cromwell to continue representing FTX and more than 100 companies formerly run by Bankman-Fried in the Chapter 11 proceedings. The senators urged Judge John Dorsey to appoint an independent examiner to scrutinise the collapse of FTX.

“As legal counsel is often central to major financial scandals, given their role in drafting financial agreements, risk management compliance practices, and corporate controls, it is perfectly reasonable to have concerns about the impartiality and manner that Sullivan & Cromwell will approach any investigation of FTX with,” the senators wrote.

In statement, Sullivan said that John Ray, who took over as FTX chief executive as the company filed for bankruptcy, could adequately supervise the company’s advisers and that FTX would have separate lawyers to deal with any conflicts. “S&C 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, as is common, and is disinterested as required by the Bankruptcy Code,” the firm said in statement. FTX did not immediately respond to a request for comment.

Earlier this month an FTX account holder, Warren Winter, filed an objection to Sullivan’s retention with the bankruptcy court, writing in court papers that its attempt to represent it in bankruptcy was “the most flagrant attempt by a fox to guard a henhouse in recent memory”. FTX paid the firm more than $20.5mn in fees and retainers before filing for bankruptcy, according to the motion. A former Sullivan partner, Ryne Miller, became general counsel for FTX US.

The law firm wrote in a December fee application that it worked with FTX “with respect to acquisition transactions and specific regulatory inquiries relating to certain US business lines”. The firm had advised FTX on its aborted acquisition of Voyager Digital, the cryptocurrency exchange it had agreed to buy out of bankruptcy in 2022.

“Significant questions about the firm’s involvement in the operations of FTX remain unanswered, including the extent to which Sullivan & Cromwell attorneys had questions or suspected fraud or the absence of appropriate legal controls, [and] the actual scope of Sullivan & Cromwell’s representation of FTX and if not Sullivan & Cromwell,” the senators wrote.

Sullivan & Cromwell disclosed in previous court filings that it had been paid $8.6mn by FTX between July 2021 and the bankruptcy filing in November 2022. An FTX affiliate, West Realm Shires, had also funded a $12mn retainer fee for Sullivan just prior to the bankruptcy. US bankruptcy law allows professional fees to be reimbursed by the bankrupt company but advisers must first demonstrate to the court that the firms seeking payment have no meaningful conflicts of interest. In the December fee application, Sullivan had said that its top partners could bill more than $2,000 per hour for their work.