Just before FTX collapsed in November, one of its outside lawyers at the law firm Sullivan & Cromwell sent an email to a colleague at another firm, insisting that the company’s finances cryptocurrency exchange were stable.
Rumors about FTX’s demise were “stupid,” attorney Andrew Dietderich wrote. “FTX is rock solid, does not use customer funds and takes no credit risk,” he said.
Four days later, FTX filed for bankruptcy. Mr. Dietderich quickly arranged for Sam Bankman-Fried, the exchange’s founder, to step down so that a new chief executive, John Jay Ray III, a corporate turnaround specialist, could run the company. When Mr. Ray needed lawyers to handle the bankruptcy, a lucrative assignment, he asked a judge to appoint the same ones who had helped him get the job: Sullivan & Cromwell.
Now that Mr. Bankman-Fried faces trial next month on fraud charges stemming from FTX’s failure, Sullivan & Cromwell’s tangled history with the stock market is drawing increased scrutiny, particularly from lawyers and from the family of Mr. Bankman-Fried.
For months, Mr. Bankman-Fried attacked Sullivan & Cromwell in court documents and on social media, arguing that the firm’s lawyers portrayed him as the one responsible for FTX’s implosion while downplaying their own involvement in the stock market. The dispute became even more personal this week when FTX sued Mr. Bankman-Fried’s parents, seeking to recover millions of dollars and claiming that the exchange operated as a “family business.”
Criticism of Sullivan & Cromwell has become widespread recently as the firm racked up more than $100 million in legal fees following the FTX bankruptcy. This summer, its lawyers clashed with representatives of FTX’s millions of disgruntled creditors over the firm’s legal strategy and the pace of its efforts to recover billions in missing assets.
“They were involved before the bankruptcy,” said Sunil Kavuri, an FTX creditor that lost more than $2 million in the collapse. “They should have known what was happening.”
The dispute over Sullivan & Cromwell’s relationship with FTX shows the range of powerful institutions that were eager to help Mr. Bankman-Fried during his rapid rise, even as he resisted basic due diligence and eschewed traditional corporate governance. And it offers a glimpse of a conflict that could play out at Mr. Bankman-Fried’s trial in Manhattan, where he is expected to lay some of the blame for FTX’s bankruptcy on Sullivan & Cromwell and a second law firm who advised him, Fenwick & West. .
In their court filings, Mr. Bankman-Fried’s lawyers suggested they might point to a so-called defense opinion to argue that these companies approved many of FTX’s actions. Prosecutors argued that the judge overseeing the trial should not allow Mr. Bankman-Fried to blame his lawyers because the founder often lied about how his company used its money. They also said he should be forced to reveal whether he relied on the legal advice of his parents, who are longtime law professors at Stanford.
An FTX spokesperson said Mr. Bankman-Fried’s claims amounted to “a biased story” aimed at unfairly blaming professionals who were trying to recover money. A representative for Sullivan & Cromwell declined to comment. In court, the law firm said FTX had never been a “regular client” and that the firm had procedures in place to guard against conflicts of interest during the bankruptcy.
A spokesman for Mr. Bankman-Fried declined to comment. The FTX founder has pleaded not guilty to charges that he orchestrated a scheme to funnel billions of dollars from customers into venture capital investments, real estate purchases and political donations. His trial is scheduled to begin October 3.
One of New York’s oldest law firms, Sullivan & Cromwell began handling legal matters for FTX in the summer of 2021 after one of its partners, Ryne Miller, was hired as as general counsel of FTX.US, the American branch of the stock exchange.
Over the next year and a half, the firm worked on 20 legal matters for FTX and its sister hedge fund, Alameda Research, according to court records, including discussions with federal regulators at the Commodity Futures Trading Commission. Sullivan & Cromwell received a total of approximately $8.5 million for this work.
Mr. Bankman-Fried said that beyond these specific matters, he worked in Sullivan & Cromwell’s offices in New York while visiting FTX’s headquarters in the Bahamas. And when FTX began to falter in November, Mr. Dietderich emailed a lawyer working on the bankruptcy of Voyager Digital, a crypto company that FTX was trying to acquire, to assure him that the exchange “wouldn’t does not lend” its clients’ money.
It turned out he was wrong. As FTX plunged into crisis the next day, Mr. Miller requested a $4 million provision for Sullivan & Cromwell so the company could work on a possible bankruptcy filing, according to messages he sent to the company. ‘era. Soon, Sullivan & Cromwell lawyers alerted authorities to possible criminal acts at FTX, while Mr. Dietderich encouraged Mr. Bankman-Fried to let Mr. Ray take over the exchange.
Essentially, Sullivan & Cromwell worked on both sides of the crisis. When FTX was a darling of the political and business elite, the firm’s lawyers helped Mr. Bankman-Fried navigate Washington as he pushed for looser regulations. After FTX’s failure, Sullivan & Cromwell worked closely with federal prosecutors, providing them with key company documents.
In January, the U.S. trustee in charge of FTX’s bankruptcy raised the possibility of removing Sullivan & Cromwell from the case, citing its failure to disclose all of its prior work for FTX. Around the same time, four U.S. senators released a letter claiming that Sullivan & Cromwell had a conflict of interest because the company might bear some responsibility for FTX’s failure. But the trustee backed down after the firm made a more detailed disclosure, and a judge allowed the lawyers to continue overseeing the bankruptcy, saying he saw “no evidence of any actual conflict.” .
Mr. Bankman-Fried remained obsessed with Sullivan & Cromwell. His lawyers have argued that the firm is providing prosecutors with evidence that makes Mr. Bankman-Fried look bad, while withholding material that could help the defense. Prosecutors denied the claim, writing in court documents that FTX and its attorneys “voluntarily responded to the government’s requests for documents.”
After Mr. Bankman-Fried’s arrest, his mother, Barbara Fried, contacted one of his colleagues at Stanford, legal ethics scholar Bill Simon, and asked him to evaluate the conduct of Sullivan & Cromwell during bankruptcy. Mr. Simon, a family friend, spent about nine hours discussing the case with Mr. Bankman-Fried in June, he said in an interview, before writing an unpublished article criticizing the company, which he shared with the New York Times.
“It is difficult to imagine how the lawyers could have done their jobs during the time they represented FTX,” he writes, without becoming familiar with practices that “are now condemned as irresponsible or worse.”
Rebecca Roiphe, a former prosecutor and professor at New York Law School, said it was fair to raise questions about possible conflicts of interest when a law firm represented a company before and during an investigation government which may involve related works.
“But this is not uncommon and does not necessarily prove wrongdoing,” she said, adding that Mr. Simon had asked her to review her article.
At the same time that Sullivan & Cromwell was going up against Mr. Bankman-Fried, the company was facing resistance from FTX’s creditors. They complain that the law firm failed to maximize proceeds from the sale of the exchange’s assets. So far, lawyers say they have recovered about $7 billion, but it’s unclear how much of that will be returned to clients, who have filed $16 billion in claims, according to court filings.
The dispute became public in July when a group appointed to represent FTX creditors in the case said Sullivan & Cromwell ignored its suggestions on how to resolve the bankruptcy. The law firm responded that some creditors had engaged in “unprofessional conduct” – lawyers were disrupted after a meeting in which at least one creditor used a four-letter word to express frustration, two said people close to the exchange.
None of these conflicts have stemmed the flow of payments to Sullivan & Cromwell, which has more than 200 lawyers, paralegals and support staff working on the FTX bankruptcy, the oldest of which charges $2,165 an hour .
In its most recent monthly bill, Sullivan & Cromwell said it was owed more than $10 million for its work on the bankruptcy, including more than 100 charges for meetings, calls or correspondence with prosecutors federal authorities suing Mr. Bankman-Fried.