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FTX Lawyers Sued: Creditors Say S&C Were ‘Vital’ to SBF Fraud

Last Updated February 19, 2024 9:35 AM
Teuta Franjkovic
Last Updated February 19, 2024 9:35 AM
By Teuta Franjkovic
Verified by Peter Henn

Key Takeaways

  • FTX creditors accuse Sullivan & Cromwell of profiting from fraud, alleging complicity in the exchange’s downfall.
  • The lawsuit questions the law firm’s ability to remain impartial in the bankruptcy case.
  • Former FTX employees allege that FTX’s general counsel steered business back to Sullivan & Cromwell.

FTX’s bankruptcy proceedings have entered a new phase, marked by a class-action lawsuit  initiated by the exchange’s creditors against Sullivan & Cromwell (S&C), the law firm managing the case.

In a legal document  submitted on February 16, the creditors accuse S&C of being complicit in the “FTX Group’s multibillion-dollar scam.” The case alleges that the firm gained financially from FTX’s fraudulent activities.

FTX Bankruptcy Saga Escalates with Class-Action Lawsuit 

Sullivan & Cromwell (S&C) was allegedly aware  of fraudulent actions and mismanagement of class members’ funds by FTX. Despite this, S&C allegedly saw an opportunity for financial gain from the misconduct of the FTX Group. Therefore, the case says, it implicitly consented to support illegal behavior for its own benefit. The lawsuit demands compensation for various charges , including civil conspiracy, assistance in fraud, and support in breaching fiduciary duties.

The lawsuit said :

“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.”

Century-Old Law Firm Faces Scrutiny

Sullivan & Cromwell is at the helm of the FTX bankruptcy case, having previously  been the exchange’s external legal advisor. These dealings include FTX’s attempts to acquire the assets of Voyager Digital and its purchase of LedgerX, for which the firm received substantial fees. In the ongoing bankruptcy proceedings, the estimated fees for S&C, which was founded in 1879, could be hundreds of millions of dollars.

The connection between FTX and Sullivan & Cromwell grew stronger when Ryne Miller transitioned from being a partner at S&C to serving as general counsel for the FTX Group in August 2021. Miller is accused  of directing at least 20 cases from FTX back to his former employer.

In a separate legal document, Daniel Friedberg, the former chief regulatory officer at FTX, revealed :

“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.”

Close Ties Under Scrutiny Amid Bankruptcy Proceedings

The lawsuit notes that former FTX CEO Sam Bankman-Fried frequently worked from S&C’s New York offices. This, the papers claim, illustrates the close connection between the two entities.

A spokesperson for S&C refuted  claims of misconduct in a statement  for media. They emphasized that the law firm had not served as the main external legal advisor for any FTX entity. They also characterized the firm’s relationship with FTX as limited and primarily focused on transactions prior to the start of the bankruptcy proceedings.

The potential for a conflict of interest involving S&C in the FTX bankruptcy case has previously attracted attention. In January 202 3, a bipartisan group of US senators appealed to the court for the appointment of an independent examiner. They argued S&C’s ties to FTX could compromise its ability to conduct a thorough investigation, thereby undermining trust.

We shall have to see what, if anything, comes of this case.

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