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A court-ordered investigation into FTX’s bankruptcy has largely absolved Wall Street law firm Sullivan & Cromwell of disqualifying conflicts of interest that would have undermined its restructuring advice to the collapsed cryptocurrency exchange.
Sullivan & Cromwell has faced repeated questions about its role as FTX’s bankruptcy counsel, given the legal work it did for the exchange in the months leading up to its implosion in November 2022.
In response it has pointed to its vast expertise in bankruptcy, investigations and financial services, which it said made it the ideal firm to recover billions of dollars in assets needed to make whole the customers and creditors whose money went missing.
The court appointed Robert Cleary, a former federal prosecutor, as an independent examiner. In a report released on Thursday he wrote he “did not identify any error in the bankruptcy court’s decision authorising the debtors to retain S&C”.
There was no evidence S&C should have been on notice that FTX founder Sam Bankman-Fried looted customers’ assets — which frustrated accountholders’ attempts to get their funds back in the days before the bankruptcy filing, he added. Bankman-Fried was convicted of fraud by a federal jury in Manhattan last year.
Cleary said he also “has seen no evidence to suggest that S&C knew about the fraud at the FTX Group [before its bankruptcy filing] or that S&C ignored red flags that would have required the firm to investigate statements made” by the exchange.
The Department of Justice had objected to an initial application to retain S&C for the bankruptcy, which had left out the extent of its ties to FTX — including the fact that Ryne Miller, a top FTX lawyer, was a former S&C partner. Eventually the law firm disclosed it had worked on more than a dozen assignments for the company prior to its bankruptcy, earning $8.5mn.
Even after S&C’s retention, some FTX accountholders accused the law firm of being too conflicted to be a central party in trying to recover funds for customers. Two prominent law professors claimed S&C’s conflicts “permeated” FTX’s bankruptcy.
Cleary did recommend further inquiry into two pre-bankruptcy transactions involving S&C. One involved Bankman-Fried’s purchase of shares in online brokerage Robinhood. An S&C lawyer told the court the firm had merely helped him with clerical matters, but accountholders accused the firm in a class-action lawsuit of advising him on structuring the transaction and knowing he used stolen customer money for it.
The examiner said while there was no evidence the allegation was true, it had yet to be fully investigated.
Separately, S&C had represented FTX in its acquisition of the LedgerX exchange in 2021. The bankruptcy court could seek to claw back the sale price from its previous owners, although the transaction has not been investigated.
The report pointed to gaps that complicated Cleary’s ability to fully investigate the issue, pointing out that some S&C lawyers were in touch with FTX employees on Signal, the encrypted messaging platform that often auto-deletes messages. Although the law firm turned over some messages, the entirety of the communication “is not and potentially never could be complete”, Cleary wrote.
Bankman-Fried, who stepped down from FTX when it filed for bankruptcy and has been sentenced to 25 years in prison for fraud, has criticised S&C, insisting the law firm played down its work for the company before its bankruptcy.
“To claim that [Sullivan’s] relationship with FTX was a ‘limited and largely transaction relationship’ is highly misleading if not outright false,” he told the Financial Times last year.
He has also said the law firm pressed him to cede control to John Ray, the turnaround expert who became FTX chief executive in the chaotic early hours of November 11 2022. Ray has described the FTX he took over as a “dumpster fire” and “crime scene”.
The bankruptcy report concluded Bankman-Fried had his own personal attorneys at the time, who informed him of the consequences of signing over control to Ray. Cleary said he had not seen any evidence that S&C “acted improperly”, although he noted Ray had an existing professional relationship with an S&C lawyer.
The law firm said: “Sullivan & Cromwell remains confident in our prepetition work for FTX and the commencement of the Chapter 11 cases, and we welcome the examiner’s findings to date rejecting various baseless allegations about our work for FTX.”
Court filings show S&C has billed roughly $200mn of fees to the FTX bankruptcy estate. The exchange last month announced accountholders could expect to get more than 118 cents on the dollar for their claims based on asset recovery efforts by the debtor.
