Sullivan & Cromwell’s role in FTX bankruptcy under rising scrutiny

Sam Bankman-Fried and another former top FTX executive have said Sullivan & Cromwell understated the scale of its work for the exchange before its collapse, sharpening the scrutiny of the law firm’s lucrative bankruptcy appointment.

Sullivan’s appointment as counsel to FTX, which filed for Chapter 11 in November, has been challenged by a creditor to the cryptocurrency exchange and questioned by four US senators who argue its close links to FTX before its collapse mean the firm cannot impartially investigate the company’s demise.

In response, Sullivan earlier this week said it “never served as primary outside counsel to any FTX entity” and “had a limited and largely transactional relationship with FTX and certain affiliates”. 

Bankman-Fried rebutted the firm’s account. “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.

Sullivan declined to comment.

The former crypto tycoon, who has pleaded not guilty to US fraud charges, said he regularly worked out of the Sullivan offices when he was in New York City and that the legal practice “was one of FTX International’s two primary law firms prior to bankruptcy, and were FTX US’s primary law firm”.

“I’ve been, regrettably, slow to respond to public misperceptions and material misstatements,” he wrote in an online post on Thursday.  

A second senior former FTX employee with direct knowledge of the matter supported Bankman-Fried’s account. “We worked with them on a near-daily basis,” the person said. “For [Sullivan] to come out and say they were just tangential and transactional, I think they were probably stretching the facts.” 

Two of FTX’s top lawyers, the general counsels for its US and venture capital arms, formerly worked for Sullivan.

Bankman-Fried has said that the law firm had pressured him in November to hand over control to John Ray, a veteran insolvency practitioner. Ray, selected among a handful of emergency candidates, had worked with Sullivan in the bankruptcy cases of Enron, Nortel Networks and Overseas Shipholding Group.

“One of the issues with high-profile situations is that clients are looking for firms with a depth and breadth of experience to help them,” said Nancy Rapoport, a law professor at University of Nevada, Las Vegas. But working for a company bankruptcy can create a conflict for the firm to continue its work and get fees from the bankruptcy assets, “especially if the firm might have to examine some of its own pre-petition advice”.

FTX had close links to Silicon Valley law firm Fenwick & West, which is known for its work for US tech start-ups. However, as FTX grew it shifted more work towards Sullivan, in particular on regulatory issues where the Wall Street firm has more expertise, the former employee said, including dealing with the Commodity Futures Trading Commission.

Warren Winter, an FTX creditor, has asked the judge overseeing FTX’s bankruptcy to block Sullivan’s appointment. In court filings, he wrote that the firm has “failed to disclose or elided glaring conflicts of interest” and “is a target for investigation with its own potential liability” over whether it was involved in the alleged wrongdoing at FTX. Winter also hit out at fees it took in advance of bankruptcy. Sullivan declined to comment.

Sullivan disclosed in previous court filings that it had been paid $8.6mn by FTX between July 2021 and the bankruptcy filing in November 2022. An FTX affiliate, West Realm Shires, had also funded a $12mn retainer fee for Sullivan just prior to the bankruptcy.

A bipartisan group of four US senators earlier this week wrote to the bankruptcy judge questioning whether Sullivan could be entrusted with investigating FTX’s collapse, given its work for the firm. “Significant questions about the firm’s involvement in the operations of FTX remain unanswered,” they wrote.

The judge, John Dorsey, is scheduled to hear the question of Sullivan’s appointment next week. In court on Wednesday he said that the letter from the lawmakers was “inappropriate” and would have “no impact whatsoever on my decision in this case”.

Sullivan has long been an adviser to top Wall Street firms on dealmaking and regulatory matters, including Goldman Sachs. Among its top attorneys are the banking specialist H Rodgin Cohen and the former SEC chair Jay Clayton.

Sullivan said in its retention application that its top partners could charge as much as $2,000 per hour. Its overall bill for the case, which would be paid for by the FTX estate, would likely total at least in the tens of millions of dollars.