The collapse of the digital asset exchange FTX has sparked a legal firestorm, with investors taking aim at Sullivan and Cromwell (S&C), the law firm tasked with overseeing FTX’s bankruptcy proceedings. Allegations of fraud and misconduct have been hurled at the law firm, raising concerns about its role in the exchange’s downfall.
Sullivan & Cromwell, established in 1879, ranks as one of America’s largest law firms. It specializes in digital asset matters, recently advising Coinbase in its SEC dispute and potentially monitoring Binance’s settlement. In November, Bankman-Fried was found guilty of using customer funds for risky investments, political contributions, and real estate.
The Allegations Against Sullivan and Cromwell
The now-bankrupt exchange’s investors have filed lawsuits against S&C, accusing the law firm of aiding and abetting fraudulent activities that contributed to the exchange’s collapse. The complaints allege that S&C’s involvement went beyond typical legal advisory roles, with the firm accused of devising misleading strategies that facilitated the exchange’s improper operations.
The lawsuit mentions Sam Bankman-Fried, ex-FTX CEO, frequenting S&C’s New York offices due to “close relationship”.
The grievance lodged by the investor states:
“[Sullivan & Cromwell’s services] went well beyond those a law firm should and ordinarily provides […] Lawyers were eager to craft not only creative but misleading strategies that furthered FTX’s misconduct […] S&C knew of FTX US and FTX Trading Ltd.’s omissions, untruthful and fraudulent conduct, and misappropriation of Class Members’ funds. Despite this knowledge, S&C stood to gain financially from the FTX Group’s misconduct and so agreed, at least impliedly, to assist that unlawful conduct for its own gain.”
Deepening Legal Entanglements
Sullivan & Cromwell’s extensive legal engagements with FTX have come under scrutiny, with the firm reportedly managing multiple legal matters for the exchange and its founder, Sam Bankman-Fried. Investors claim that S&C had intricate knowledge of FTX’s financial dealings and actively participated in the mismanagement of customer funds.
The relationship between FTX and S&C deepened when Ryne Miller, a former member of the law firm, joined the bankrupt exchange as its general counsel. Miller allegedly prioritized funneling business back to his old firm, resulting in numerous engagements between S&C and the exchange. This close relationship has raised questions about conflicts of interest and impartiality.
Daniel Friedberg, who previously served as the chief regulatory officer at FTX, in a separate submission to the court, stated:
“Mr. Miller informed me that it was very important for him personally to channel a lot of business to S&C as he wanted to return there as a partner after his stint at the Debtors,”
Financial Implications
Sullivan & Cromwell’s financial gains from its involvement with FTX are staggering, with reports indicating that the firm earned over $180 million from related matters. This substantial income has fueled suspicions about the firm’s motivations and potential conflicts of interest.
Reports indicate that Between November 2022 and November 2023, S&C billed over $153 million for services in the exchange’s bankruptcy, averaging around $11.8 million monthly.
Legal Battles and Scrutiny
The lawsuits against S&C represent a new chapter in the legal battle following the exchange’s collapse. U.S. Senators have previously raised concerns about the firm’s impartiality, and a federal appeals court has ordered an independent examiner to investigate the collapse, citing potential conflicts concerning S&C’s prior work for the exchange.
Notably, Andy Dietderich’s team at the firm, serving as the exchange’s primary bankruptcy counsel, had assured judge on Jan 31 that FTX intends to fully reimburse customers.
A representative from the legal firm refuted any allegations of misconduct and said:
“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”
Implications for S&C
The allegations against S&C have cast a shadow over the firm’s reputation and raised questions about its involvement in FTX’s downfall. The legal battle underscores the intricate connections between legal advisors and their clients within the volatile digital asset market, highlighting the need for transparency and accountability in legal proceedings.
As the legal saga surrounding the now bankrupt exchange continues to unfold, the spotlight remains firmly on Sullivan & Cromwell. With investors seeking justice and accountability, the outcome of these lawsuits could have far-reaching implications for both the firm and the broader digital asset industry. As the investigations progress, all eyes will be on the courts to deliver a fair and transparent resolution to this complex legal drama.
