Sullivan & Cromwell, a prestigious Wall Street law firm, has been accused of having a conflict of interest and inflating its fees in the bankruptcy case of FTX, a failed cryptocurrency exchange. The firm has been working on both sides of the crisis, advising FTX before its collapse and representing its bankruptcy trustee afterwards.
FTX’s Rise and Fall
FTX was founded by Sam Bankman-Fried, a Stanford graduate and former Wall Street trader, in 2021. The platform claimed to offer a safe and secure way to trade crypto assets, such as Bitcoin, Ethereum, and Dogecoin. FTX attracted millions of investors, including celebrities, politicians, and sports teams, and became one of the largest crypto exchanges in the world.
However, in February 2023, FTX filed for bankruptcy, after the U.S. government accused Bankman-Fried of fraud, money laundering, and market manipulation. The government alleged that Bankman-Fried had diverted investor funds to his private hedge fund, Alameda Research, and used them to manipulate the prices of crypto assets. The government also claimed that FTX had lied about its financial condition, security, and compliance with regulations.
Bankman-Fried denied the charges and blamed his lawyers for giving him bad advice. He is scheduled to face trial in October 2023.
Sullivan & Cromwell’s Involvement
Sullivan & Cromwell, a law firm with a reputation for handling complex and high-profile cases, has been involved with FTX since summer 2021, when it hired Ryne Miller, the former general counsel of FTX’s U.S. arm, as a partner. The firm then worked on 20 legal matters for FTX and Alameda Research, including regulatory, transactional, and litigation issues.
According to the New York Times, Sullivan & Cromwell’s partner Andrew Dietderich declared that FTX was “rock solid” in an email to another lawyer, just four days before FTX filed for bankruptcy. Dietderich then arranged for Bankman-Fried to be replaced as CEO by John Jay Ray III, a corporate turnaround specialist, who sought the appointment of Sullivan & Cromwell to manage the bankruptcy.
Since then, Sullivan & Cromwell has been working closely with federal prosecutors, supplying them with key corporate records and cooperating with their investigation. The firm has also been racking up more than $100 million in legal fees from the bankruptcy work, according to the New York Times. The 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.
Conflict of Interest and Fee Dispute
Sullivan & Cromwell’s role in the FTX bankruptcy has drawn criticism from various parties, including Bankman-Fried, his family, FTX’s creditors, and other law firms. They have accused the firm of having a conflict of interest, inflating its fees, and failing to disclose its prior relationship with FTX.
Bankman-Fried has alleged that Sullivan & Cromwell made him the fall guy in the collapse of FTX, while downplaying its own work for the company. He has also claimed that the firm advised him to take actions that led to his criminal charges, such as transferring funds to Alameda Research and using offshore entities to evade regulations. He may use an advice-of-counsel defense at his trial, suggesting that many of FTX’s actions were approved by its lawyers.
Bankman-Fried’s parents, who are both law professors at Stanford, have also filed a lawsuit against Sullivan & Cromwell, alleging that the firm used its influence to enrich itself and harm their son. They have accused the firm of breaching its fiduciary duty, committing legal malpractice, and violating ethical rules.
FTX’s creditors, who are owed more than $1 billion, have also challenged Sullivan & Cromwell’s fees, arguing that they are excessive and unreasonable. They have asked the bankruptcy judge to appoint an independent examiner to review the firm’s billing practices and potential conflicts of interest.
Other law firms, such as Quinn Emanuel and Boies Schiller, have also questioned Sullivan & Cromwell’s role in the FTX bankruptcy, claiming that the firm has a monopoly over the case and is preventing other lawyers from representing FTX’s stakeholders.
Sullivan & Cromwell has denied any wrongdoing and defended its work for FTX. The firm has said that it was never the primary counsel to any FTX entity, and that its work before the bankruptcy was limited and largely transactional. The firm has also said that it obtained waivers from FTX and Alameda Research to represent the bankruptcy trustee, and that it disclosed its prior relationship with FTX to the court and the creditors.
The bankruptcy judge has allowed Sullivan & Cromwell to continue the work, after finding no evidence of actual conflicts. The judge has also approved the firm’s fees, subject to further review.