By Pam Martens and Russ Martens: December 12, 2022 ~
Two days after the disgraced crypto exchange, FTX, filed its bankruptcy petition in Delaware bankruptcy court, Wall Street On Parade published an article explaining why it was problematic that the Big Law firm of Sullivan & Cromwell somehow managed to become the legal advisor on the FTX bankruptcy process despite its prior engagements with FTX and Alameda Research, the hedge fund owned by Sam Bankman-Fried, the co-founder and ousted CEO of FTX. We wrote at the time:
“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…
“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….”
Now, lots of other folks are sharing Wall Street On Parade’s skepticism of what’s happening in the Delaware bankruptcy court involving the FTX bankruptcy proceedings.
Just last Friday, December 9, four major news outlets filed an emergency motion with the court asking for transparency in the proceedings. The news outlets are Bloomberg News, Dow Jones (parent of the Wall Street Journal), the New York Times and the Financial Times. The news outlet intervenors wrote as follows in their court filing:
“Debtors [FTX and its more than 100 affiliates incorporated in secrecy jurisdictions like the Bahamas and Antigua] have been accused of lack of transparency in their business. That mindset appears to have carried over to this bankruptcy, as they have taken the extraordinary step of seeking to keep under seal their list of creditors, a document which, with very few exceptions, has historically been open to the public. Intervenors object to the continued sealing and redaction of information that historically has been quintessentially public in nature.”
“Redacting the names of the creditors will have far-reaching impact as the case progresses. Will any creditor who wants to file a motion or an adversary proceeding be entitled to do so anonymously? Would preference actions redact the names of defendants who are creditors? This will turn the entire proceeding into a farce, with only the Debtor’s name publicly spoken. This would be contrary to Congress’s ‘strong desire to preserve the public’s right of access to judicial records in bankruptcy proceedings.’ Video Software Dealers Ass’n, 21 F.3d at 26 (quoted in In re Alterra Healthcare Corp., 353 B.R. at 75). The Court has indicated that proofs of claim will not be submitted anonymously. If disclosure it inevitable, there is no point to keeping the names anonymous now.”
That action by major news outlets followed a filing on December 1 by the U.S. Trustee, who is the watchdog for the U.S. Department of Justice in bankruptcy cases. The U.S. Trustee’s filing requested the appointment of an independent examiner in the FTX matter.
In making the request, the U.S. Trustee, Andrew R. Vara, noted that FTX had disintegrated over “the course of eight days in November” after having a valuation of “$32 billion just earlier this year.” He called it “likely the fastest big corporate failure in American history.” He further explained his demand as follows:
“An examiner could—and should—investigate the substantial and serious allegations of fraud, dishonesty, incompetence, misconduct, and mismanagement by the Debtors, the circumstances surrounding the Debtors’ collapse, the apparent conversion of exchange customers’ property, and whether colorable claims and causes of action exist to remedy losses. The appointment of an examiner is mandatory under 11 U.S.C. § 1104(c)(2) because the Debtors’ fixed, liquidated, unsecured debts to its customers alone far exceed section 1104(c)(2)’s $5 million threshold.
“An examination is preferable to an internal investigation under the facts of these cases because the findings and conclusions of the examination will be public and transparent, which is especially important because of the wider implications that FTX’s collapse may have for the crypto industry….”
Like Wall Street On Parade, the U.S. Trustee shows skepticism in his court filing about how, and by whom, John Ray III, the man who replaced Sam Bankman-Fried as CEO of FTX, was appointed. The U.S. Trustee writes in the court filing:
“Mr. Ray was appointed the CEO of the Debtors on the Petition Date, after Bankman-Fried resigned as CEO. Mr. Ray does not indicate who appointed him. As noted above, the Omnibus Corporate Authority signed by Bankman-Fried reflects that he ‘authorize[d], instruct[ed] and consent[ed]’ to Mr. Ray’s appointment. Mr. Ray’s first official act was to authorize the chapter 11 filings of the Debtors and the commencement of these cases. But the Omnibus Corporate Authority attached to the Debtors’ petitions was signed solely by Bankman-Fried. Mr. Ray states that ‘new independent directors’ have been appointed to what Mr. Ray calls the ‘the primary companies in the FTX Group,’ with one separate director being appointed to each of the WRS, the Alameda, and the Ventures Siloes and two other directors to the Dotcom Silo. Mr. Ray does not disclose who appointed these directors. Mr. Ray does not indicate whether Bankman-Fried’s counsel was consulted with respect to the appointments. He also does not indicate whether these new directors are the only directors on the Debtors’ boards or whether any directors from the prepetition period remain.”
Elsewhere in the court filing the U.S. Trustee writes:
“An investigation by an examiner into the alleged conversion by the FTX Trading arm of the Debtors of $10 billion of customers’ property to lend to its affiliate Alameda, in violation of the express provisions in FTX’s customer contracts, and into the use of software to conceal such misuse is unquestionably in the interests of the Debtors’ creditors and other interests of the estates. The many instances of what Mr. Ray describes as a ‘complete failure of corporate controls and  a complete absence of trustworthy financial information as occurred here’ such as those detailed in paragraph 30 of this Motion, also warrant examination.”
“…the questions here are much broader than in a typical chapter 11 case; they are not merely about where money flowed or who can sue whom. Rather, they are larger questions about the fundamentals of these cases. Was this an unsuccessful business or a successful fraud? In other words, is there anything to save here?”
The U.S. Trustee’s court filing is signed by Juliet M. Sarkessian, Benjamin A. Hackman, and David Gerardi, trial attorneys for the U.S. Department of Justice.
Since the proceedings thus far in the Delaware bankruptcy court have drawn a dark curtain around the parties that were involved with FTX, either as investors or customers, the Securities and Exchange Commission took the unusual step last week of ordering all publicly-traded companies that had relationships with crypto companies that are experiencing financial distress or filing bankruptcy to make disclosures in their SEC filings as to the “direct or indirect impact that these events and collateral events have had or may have on their business.”
To underscore the ramifications that may occur from failure to make appropriate disclosures in their SEC filings, the SEC provided a sample letter that a company suspected of withholding relevant information from the SEC and the public might receive. The sample letter included the following paragraph:
“To the extent material, discuss how the bankruptcies of XX and XX and the downstream effects of those bankruptcies have impacted or may impact your business, financial condition, customers, and counterparties, either directly or indirectly. Clarify whether you have material assets that may not be recovered due to the bankruptcies or may otherwise be lost or misappropriated.”
The requests by the media outlets and the U.S. Trustee, along with other matters, are expected to be discussed at this Friday’s FTX hearing in the Delaware bankruptcy court. You can watch the live stream of the hearing, beginning at 10:00 a.m. ET at this link.