Simply earlier than FTX collapsed in November, one in all its outdoors legal professionals on the regulation agency Sullivan & Cromwell emailed a colleague at one other agency, insisting that the cryptocurrency trade’s funds have been secure.
Rumors of FTX’s demise have been “silliness,” the lawyer, Andrew Dietderich, wrote. “FTX is rock stable, doesn’t use buyer funds or take credit score danger in any respect,” he mentioned.
4 days later, FTX filed for chapter. Mr. Dietderich rapidly organized for Sam Bankman-Fried, the trade’s founder, to step down so {that a} new chief govt, John Jay Ray III, a specialist in company turnarounds, could lead on the corporate. When Mr. Ray wanted legal professionals to handle the chapter, a profitable task, he requested a decide to nominate the identical ones who had helped get him the job: Sullivan & Cromwell.
Now, with Mr. Bankman-Fried set to go on trial subsequent month on fraud expenses stemming from FTX’s failure, Sullivan & Cromwell’s tangled historical past with the trade is drawing scrutiny — particularly from Mr. Bankman-Fried’s legal professionals and household.
For months, Mr. Bankman-Fried has attacked Sullivan & Cromwell in court docket papers and on social media, arguing that the agency’s legal professionals set him up as the autumn man for FTX’s implosion whereas downplaying their very own involvement with the trade. The dispute turned much more private this week when FTX sued Mr. Bankman-Fried’s mother and father, searching for to claw again thousands and thousands of {dollars} and claiming the trade had operated like a “household enterprise.”
Criticism of Sullivan & Cromwell has turn out to be extra widespread not too long ago, because the agency has racked up over $100 million in authorized charges from FTX’s chapter. This summer season, its legal professionals clashed with representatives for FTX’s thousands and thousands of disgruntled collectors over the agency’s authorized technique and the tempo of its efforts to get well billions in lacking belongings.
“They have been concerned earlier than the chapter,” mentioned Sunil Kavuri, an FTX creditor who misplaced greater than $2 million within the collapse. “They need to’ve been conscious of what was occurring.”
The dispute over Sullivan & Cromwell’s relationship with FTX reveals the vary of highly effective establishments that have been keen to assist Mr. Bankman-Fried throughout his speedy rise, at the same time as he resisted primary due diligence and eschewed conventional company governance. And it gives a preview of a battle that will unfold at Mr. Bankman-Fried’s trial in Manhattan, the place he’s anticipated to shift among the blame for FTX’s chapter to Sullivan & Cromwell and a second regulation agency that suggested him, Fenwick & West.
In court docket filings, Mr. Bankman-Fried’s legal professionals have steered that they could elevate a so-called recommendation of counsel protection to argue that these companies authorized a lot of FTX’s actions. Prosecutors have argued that the decide overseeing the trial shouldn’t allow Mr. Bankman-Fried responsible his legal professionals, as a result of the founder usually lied about how his enterprise was utilizing its cash. In addition they mentioned he ought to need to disclose whether or not he relied on authorized recommendation from his mother and father, who’re longtime Stanford regulation professors.
A spokesman for FTX mentioned Mr. Bankman-Fried’s claims have been “a biased story line” meant to unfairly blame the professionals making an attempt to get well cash. A consultant for Sullivan & Cromwell declined to remark. In court docket, the regulation agency has mentioned that FTX was by no means a “common shopper,” and that the agency had put in place procedures to protect in opposition to conflicts of curiosity throughout the chapter.
A spokesman for Mr. Bankman-Fried declined to remark. The FTX founder has pleaded not responsible to expenses that he orchestrated a scheme to funnel billions in buyer cash into enterprise investments, actual property purchases and political donations. His trial is scheduled to start on Oct. 3.
One of many oldest regulation companies in New York, Sullivan & Cromwell started dealing with authorized issues for FTX in summer season 2021 after one in all its companions, Ryne Miller, was employed as basic counsel of FTX.US, the trade’s American arm.
Over the subsequent 12 months and a half, the agency labored on 20 authorized issues for FTX and its sister hedge fund, Alameda Analysis, court docket information present, together with discussions with federal regulators on the Commodity Futures Buying and selling Fee. Sullivan & Cromwell acquired a complete of about $8.5 million for the work.
Mr. Bankman-Fried has mentioned that past these particular issues, he labored out of Sullivan & Cromwell’s workplaces in New York whereas visiting from FTX’s Bahamas headquarters. And when FTX began teetering in November, Mr. Dietderich emailed a lawyer engaged on the chapter of Voyager Digital, a crypto agency that FTX was making an attempt to accumulate, to guarantee him that the trade “doesn’t lend” its prospects’ cash.
It turned out he was improper. As FTX plunged into disaster the subsequent day, Mr. Miller sought a $four million retainer for Sullivan & Cromwell so the agency might work on a doable chapter submitting, in accordance with messages he despatched on the time. Quickly, Sullivan & Cromwell legal professionals alerted the authorities to doable prison malfeasance at FTX, whereas Mr. Dietderich inspired Mr. Bankman-Fried to let Mr. Ray take over the trade.
In essence, Sullivan & Cromwell labored either side of the disaster. When FTX was a darling of the company and political elite, the agency’s legal professionals helped Mr. Bankman-Fried navigate Washington as he pushed to loosen laws. After FTX failed, Sullivan & Cromwell labored carefully with federal prosectors, supplying them with key company information.
Mr. Bankman-Fried has remained fixated on Sullivan & Cromwell. His legal professionals have argued that the agency is offering proof to the prosecutors that displays poorly on Mr. Bankman-Fried, whereas withholding materials that might assist the protection. Prosecutors have denied that declare, writing in court docket papers that FTX and its legal professionals “have been responding to the federal government’s doc requests voluntarily.”
After Mr. Bankman-Fried’s arrest, his mom, Barbara Fried, contacted one in all her Stanford colleagues, the authorized ethics scholar Invoice Simon, and requested him to guage Sullivan & Cromwell’s conduct within the chapter. Mr. Simon, a household pal, spent about 9 hours discussing the case with Mr. Bankman-Fried in June, he mentioned in an interview, earlier than writing an unpublished article criticizing the agency, which he shared with The New York Occasions.
“It’s laborious to see how the legal professionals might have finished their jobs throughout the interval by which they represented FTX,” he wrote, with out familiarizing themselves with practices that “at the moment are condemned as irresponsible or worse.”
Rebecca Roiphe, a former prosecutor and a professor at New York Regulation Faculty, mentioned it was truthful to boost questions on potential conflicts of curiosity when a regulation agency represented an organization each earlier than and through a authorities investigation that may contain associated work.
“However this isn’t unusual and doesn’t essentially show wrongdoing,” she mentioned, including that Mr. Simon had requested her to assessment his article.
On the identical time that Sullivan & Cromwell has clashed with Mr. Bankman-Fried, the agency has confronted pushback from FTX’s collectors. They’ve complained that the regulation agency has failed to maximise proceeds from the sale of the trade’s belongings. Up to now, the legal professionals say they’ve recovered about $7 billion, nevertheless it’s unclear how a lot of that will probably be returned to prospects, who’ve filed $16 billion in claims, court docket filings present.
The dispute spilled into public in July when a gaggle appointed to symbolize FTX’s collectors within the case mentioned Sullivan & Cromwell had ignored its options about methods to resolve the chapter. The regulation agency responded that some collectors have been partaking in “unprofessional conduct” — the legal professionals had been left perturbed after a gathering by which a minimum of one creditor used a four-letter phrase to precise frustration, two individuals conversant in the trade mentioned.
None of these conflicts have stemmed the stream of funds to Sullivan & Cromwell, which has greater than 200 legal professionals, paralegals and help workers members engaged on FTX’s chapter, essentially the most senior of whom cost $2,165 an hour.
In its most up-to-date month-to-month invoice, Sullivan & Cromwell mentioned it was owed greater than $10 million for its work on the chapter, together with over 100 expenses for conferences, calls or correspondence with the federal prosecutors pursuing Mr. Bankman-Fried.