Sullivan & Cromwell Faces Criticisms for Actions in FTX Bankruptcy Case
Two law professors have raised concerns about the role played by law firm Sullivan & Cromwell in the case of cryptocurrency exchange platform FTX, from its rise to bankruptcy and liquidation. They argue that the firm prioritized its own interests over the stakeholders of FTX, including clients with frozen funds, reigniting criticism of its involvement.
S&C knew, or could have known, that FTX was commingling client funds.
Serious Accusations Against S&C in the FTX Case
Jonathan Lipson from Temple University and David Skeel from the University of Pennsylvania have published an article alleging that Sullivan & Cromwell failed in its duties towards the stakeholders of FTX, highlighting conflicts of interest in FTX’s bankruptcy filing and in all aspects of the case. These accusations come at a critical moment, just before the conviction of FTX founder Sam Bankman-Fried, scheduled for this Thursday.
The allegations suggest that Sullivan & Cromwell may have violated ethical duties of confidentiality, candor, and loyalty. The firm is accused of facilitating John Ray’s control of FTX through questionable maneuvers, suggesting that Sullivan & Cromwell may have acted against the interests of FTX and its stakeholders.
Sullivan & Cromwell, having worked on twenty merger and regulatory missions for FTX, reportedly earned nearly $10 million before FTX’s bankruptcy filing in November 2022. Professors Lipson and Skeel point out that the firm was well positioned to know that FTX was commingling client assets and did not attempt to prevent the exchange’s bankruptcy, ultimately benefiting from it.
Investigation into FTX and S&C’s Actions
The US Department of Justice has appointed Robert Cleary as an independent examiner in FTX’s bankruptcy to provide a detailed report on the events leading to the company’s implosion, including the work of its advisors.
Meanwhile, Sullivan & Cromwell has been criticized for its business decisions during the case, including the deemed insufficient sale of the LedgerX unit and the choice not to sue Binance for withdrawing $2 billion from FTX.
In response to the allegations, John Ray, appointed CEO to oversee FTX, called the professors’ article unfounded and distorting the facts. Furthermore, Sullivan & Cromwell, representing the FTX estate, has faced challenges from the start, notably from the US Trustee’s office, which initially objected to its retention, arguing that the firm had not properly disclosed the extent of its ties to FTX.
Despite these objections, the court ultimately approved S&C’s appointment, which earned $184 million in fees between November 2022 and January 2024.
Sullivan & Cromwell defended themselves, stating that all of the company’s actions had to be approved by the bankruptcy court with the consent of the US Trustee and creditors, and that Sam Bankman-Fried had multiple lawyers representing him personally. Additionally, they indicated that clients could potentially receive the full amount of their claims by the end of the bankruptcy.
