Sullivan & Cromwell to Be Scrutinized at the FTX Bankruptcy Court on Friday

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Last Updated on January 20, 2023 by Bitfinsider

Sam Bankman-Fried used to work out of the New York City office of Sullivan & Cromwell. Now, the law firm is being questioned about its ability to examine FTX, the disgraced former billionaire’s crypto enterprise.

On Friday, a bankruptcy judge will hear arguments over whether the white-shoe law firm was too close to the struggling cryptocurrency exchange before it crumbled.

The United States Trustee handling the FTX bankruptcy proceedings objected to Sullivan & Cromwell and two other companies functioning as counsel to the FTX debtors. A pair of FTX customers who have money locked on the halted exchange have also criticized the law firm’s involvement. In addition, a group of US senators has raised its own concerns.

“Sullivan & Cromwell has applied to be named the FTX Group’s bankruptcy counsel in the most brazen attempt by a fox to guard a henhouse in recent memory,” Warren Winter, an FTX client with $350,000 on the platform, stated in a court petition opposing to the nomination. Another FTX customer, Richard Brummond, objected as well.

“Sullivan & Cromwell is not merely an unacceptable candidate for nomination as the FTX Group’s bankruptcy counsel – it is a target for investigation with its own potential responsibility. Its selection as counsel would jeopardize the estate and create a rigged game, eroding creditors’ and the public’s trust in the bankruptcy process,” Winter added.

However, FTX CEO John Ray, who took over the company in November, contended in court filings that dismissing Sullivan & Cromwell would “severely” or “irreparably” hamper efforts to return money to creditors and consumers.

“The advisers working under my guidance have worked diligently and ceaselessly for the last 70 days to regain control of what can only be described as a “dumpster fire” in order to prevent assets from being exhausted and to take action to realize value relating to the debtors’ assets. “The counselors are not the villains in these cases,” Ray stated in court.

Winter and Brummond’s complaints were dismissed by the FTX debtors as “baseless” and part of a “fishing expedition.” The FTX case’s formal committee of unsecured creditors has issued its own statement in support of Sullivan & Cromwell’s conduct in the bankruptcy.

Text messages obtained from Bankman-Fried’s congressional testimony reveal Miller telling other FTX executives, “I’m in charge now,” and instructing them to deposit a $4 million retainer to Sullivan & Cromwell.

Objectors cited Sullivan & Cromwell’s failure to disclose its contacts with Miller or Tim Wilson, an FTX lawyer and former Sullivan & Cromwell associate. Miller did not respond to an interview request. Ray is still employed by West Realm Shires, the parent company of FTX’s US unit, but “has no day-to-day responsibilities,” according to a court document.

Sullivan & Cromwell’s first disclosures were “very inadequate,” according to Juliet Sarkessian, the U.S. Trustee’s lawyer, in an email to Sullivan & Cromwell lawyers. This week, the email communication was presented in a court file. Sarkessian has sought a judge to appoint an examiner in the case, but has not responded to a request for comment. A hearing will be held in February to assess the request.

Dan Friedberg, who previously served as FTX US’s top compliance officer and FTX International’s chief regulatory officer, joined Warren’s objection in a court filing on Thursday afternoon. Friedberg claimed he had “many troubling interactions” with Sullivan & Cromwell following FTX’s bankruptcy filing.

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