FTX Examiner Clears Law Firm Sullivan & Cromwell of Misconduct But Calls for Deeper Look at Pre-Bankruptcy Deals

News | June 5, 2024 By:

On Thursday, May 23, 2024, a court-appointed examiner in the bankruptcy case of failed cryptocurrency exchange FTX issued a report absolving the debtor’s law firm Sullivan & Cromwell of conflicts of interest but calling for further investigation into two pre-bankruptcy transactions.

Robert J. Cleary of Patterson Belknap Webb & Tyler LLP was appointed in March to investigate issues raised regarding Sullivan & Cromwell’s retention as counsel for FTX after it filed for Chapter 11 bankruptcy protection in November 2022.

Cleary concluded that the bankruptcy court properly approved Sullivan & Cromwell’s hiring despite the firm’s $8.5 million in pre-bankruptcy work for FTX and its former CEO Sam Bankman-Fried. “The court found that there was nothing in the record that would merit disqualification of S&C based on its prepetition work,” the report said. “After carefully reviewing the record that was before the court, the examiner agrees with the court’s conclusion.” However, Cleary did uncover two areas warranting further examination.

One issue concerned FTX’s $300 million pre-bankruptcy acquisition of LedgerX, a bitcoin options exchange. Sullivan & Cromwell advised on the deal and earned $1.5 million in fees, but FTX only sold LedgerX’s parent company for $50 million after filing for bankruptcy. The report found the potential clawback matter regarding LedgerX’s former shareholders was not fully investigated as it should have been given Sullivan & Cromwell’s role. As such, Cleary will conduct further examination to determine if any causes of action exist.

The other transaction of interest was FTX’s $500 million purchase of stock in digital trading platform Robinhood Markets Inc. While Sullivan & Cromwell’s role was limited, no prior investigation explored potential conflicts. “Given that no prior investigation has been conducted into the Robinhood transaction, the examiner recommends an investigation into the details of this transaction,” the report stated.

On other allegations, Cleary found no evidence Sullivan & Cromwell was aware of fraud schemes at FTX or ignored red flags. The firm also did not improperly pressure Bankman-Fried into bankruptcy or direct the case filing location. Bankman-Fried had competent separate counsel advising on omnibus authority approving the Chapter 11 petitions.

Regarding FTX.US’s insolvency, Cleary found Sullivan & Cromwell discovered a $46 million cash shortfall days before filing and further investigation showed a $141 million hole, contradicting Bankman-Fried’s past claims of solvency. More examination is needed on the reasons for and duration of balance sheet shortfalls at FTX.US.

Sullivan & Cromwell said it stands by its representations and will cooperate with further court-ordered investigations, which will provide more clarity on the downfall of FTX and victims’ hopes of compensation amid the largest cryptocurrency collapse to date.

Please contact BlockTribune for access to a copy of this filing.