By Pam Martens and Russ Martens: November 13, 2022 ~
According to Reuters, Sullivan & Cromwell has been named as one of the advising law firms to the disgraced crypto exchange, FTX, in its bankruptcy proceedings. Sam Bankman-Fried, the co-founder and CEO of FTX, vaporized the high-profile crypto firm from a $32 billion valuation to smoldering ashes last week.
Reuters reported that Bankman-Fried had moved as much as $10 billion of FTX customers’ money to his separate hedge fund, Alameda Research, through a “backdoor” in its software. Alameda had lost much of the money on wild bets while $1 billion to $2 billion had just “disappeared,” according to Reuters. The Financial Times reported that FTX held just $900 million “in easily sellable assets” against $9 billion “of liabilities the day before it collapsed into bankruptcy.”
The FTX news grew even more bizarre over the weekend with the New York Times reporting that $515 million may have been stolen or hacked from FTX after the bankruptcy filing. This raises serious concerns about the capability of those put in charge of the bankruptcy proceedings to safeguard what’s left of the assets.
Bankman-Fried was replaced as FTX CEO on Friday with the naming of John J. Ray III to replace him, a lawyer serving as the chief counsel at Greylock Partners LLC, who previously oversaw the liquidation of Enron.
The selection of Sullivan & Cromwell as a bankruptcy advisor to FTX might be problematic for some of its looted investors and customers, given Sullivan & Cromwell’s past work for FTX.
The General Counsel of FTX.US, the FTX exchange serving customers in the U.S., is former Sullivan & Cromwell partner, Ryne Miller, who had co-chaired the law firm’s commodities, futures and derivatives group and worked at the law firm for eight years prior to joining this speculative, upstart crypto exchange. Miller had previously served as legal counsel for the current SEC Chair, Gary Gensler, when Gensler was Chair of the Commodity Futures Trading Commission. FTX.US is also included in the recent bankruptcy filing of FTX, despite Bankman-Fried Tweeting that the firm was fine just days before the bankruptcy filing.
Another Sullivan & Cromwell partner involved with FTX is Ken Li, who represented FTX.US last year in its acquisition of crypto derivatives firm, LedgerX, which provides trading in crypto futures, options and swaps to both retail and institutional clients.
But of greatest significance was Sullivan & Cromwell’s representation of both Alameda Research and FTX in their joint bid to purchase the assets of bankrupt crypto exchange, Voyager Digital Holdings, last year. While Sullivan & Cromwell’s website states that it represented FTX.US in its winning bid, the filings in the court case indicate that Sullivan & Cromwell lawyers Andrew G. Dietderich, Brian D. Glueckstein, and Benjamin S. Beller were also representing Alameda Research, Bankman-Fried’s hedge fund that is alleged to have misappropriated customers’ funds from the FTX exchange. One bankruptcy filing in the Voyager matter by the Sullivan & Cromwell attorneys offers this:
“On July 22, 2022, FTX Trading Ltd. and West Realm Shires Inc., operators of the FTX.com and FTX US cryptocurrency exchanges respectively (together ‘FTX’), and Alameda made a public proposal conveyed to the Debtors for a transaction to provide customers immediate liquidity by moving assets and customer relationships to the respective FTX platform (the ‘Joint Proposal’). Under the Joint Proposal, the cash value of all appropriate digital assets relating to the retail customer claims and all participating retail customers would move to either FTX.com or, for any customers that are US residents, to FTX.us. Each customer would immediately receive a ratable share of the value of the assets moved, subject to this Court’s approval. Customers would receive this value in a liquid account and be able immediately to withdraw the cash or trade in cryptocurrency.”
According to documents, Voyager had approximately one million customer accounts that could potentially move to the FTX international or FTX.US exchanges. Given the number of customers and their life savings that would be impacted, one would have thought that Sullivan & Cromwell would have done due diligence to ascertain if FTX had reliable and stable finances and proper accounting practices.
Sullivan & Cromwell listed 16 of their attorneys that worked on the deal, writing that: “The S&C team advising FTX US was led by Andy Dietderich and Brian Glueckstein on restructuring matters and Mitch Eitel on financial services matters. The team included Benjamin Beller, Mimi Wu, Christian Jensen, Yuexin Zhu, Jessica Ljustina and Yiming Sun. Ryan Logan, Justin Orr and Jamie Chang advised on intellectual property matters. Jameson Lloyd and HyunKyu Kim advised on tax matters. David Gilberg and Colin Lloyd advised on regulatory matters.”
Another troubling aspect of the Sullivan & Cromwell court filing in the Voyager matter is that the lawyers apparently knew that Alameda Research was trading on behalf of “private owners” and that it would be a major beneficiary of a rescue of Voyager by FTX. They write in the court filing:
“Alameda trades in digital assets for its own account on behalf of private owners. Based on the information disclosed by the Debtors, Alameda is the largest stockholder and largest creditor of the Debtors. Alameda Ventures Ltd. is the only identified creditor of debtor Voyager Digital Holdings, Inc. (‘Voyager Holdings’), the holding company that owns 100% of debtor Voyager Digital, LLC (Voyager Digital’), the Debtors’ primary operating company.”
With FTX and Alameda Research now in bankruptcy themselves, Voyager has announced that they have reopened the bidding process for its assets.
Sullivan & Cromwell is not a name that inspires confidence here at Wall Street On Parade. For starters, it was Sullivan & Cromwell partner, Jay Clayton, who was tapped by President Donald Trump to Chair the Securities and Exchange Commission during Trump’s one term as president. (See our report: SEC Chair Jay Clayton Left Markets in the Biggest Mess Since 1929.) While SEC Chair, Clayton also attempted a failed coup to take over as the top criminal prosecutor in the U.S. Attorney’s office in Manhattan. (The SEC has only civil powers but the Justice Department can bring criminal charges against Wall Street firms. Or not.)
Clayton was a problematic pick for SEC Chair because he had represented 8 of the 10 largest Wall Street firms in the prior three years before his SEC nomination. (These Wall Street firms are serially charged with crimes and fail to reform themselves.) One of those firms was Goldman Sachs, which became embroiled in a criminal investigation by the Justice Department for its role in a bribery and looting case involving the sovereign wealth fund of Malaysia known as 1MDB. (Criminal charges were brought by the Justice Department and settled in October 2020 with Goldman Sachs admitting its role and paying more than $2.9 billion to make the case go away.)
What most Americans have never heard about in the notorious matter of 1MDB is that Sullivan & Cromwell was involved in making some of the luxury real estate purchases on behalf of the alleged criminals who looted 1MDB, according to the U.S. Department of Justice. Sullivan & Cromwell’s name makes seven appearances in the criminal complaint filed in court by the Justice Department. No charges were ever brought against Sullivan & Cromwell.
After leaving the SEC, Clayton became an adviser to two crypto-related firms, Fireblocks and Electric Capital. Clayton is currently listed on the Sullivan & Cromwell website as Senior Policy Advisor and Of Counsel.
Sam Bankman-Fried is also going after Big Law representation for his criminal defense, hiring Martin Flumenbaum of Paul, Weiss, Rifkind, Wharton & Garrison. Paul Weiss is the law firm that perpetually gets Citigroup out of fraud charges. Its own due diligence has also come under question in the past. See The Untold Story of the Paul Weiss Internal Investigation that Didn’t Catch a Massive Stock Fraud.