By Pam Martens and Russ Martens: January 27, 2023 ~

A battle between Big Law firm Sullivan & Cromwell and the U.S. Trustee (who represents the U.S. Department of Justice in the bankruptcy proceedings) is heating up for a hearing scheduled for February 6. The hearing will take arguments for and against why Sullivan & Cromwell should not be allowed to investigate its own past conduct in the serial frauds that prosecutors have alleged occurred at Sam Bankman-Fried’s crypto companies.

Since the FTX bankruptcy filing on November 11, Sullivan & Cromwell has been functioning as lead counsel for the bankruptcy estate and was officially appointed to that position by the court on January 20, despite what looks like fatal conflicts to a growing number of observers.

Both Sullivan & Cromwell and the U.S. Trustee have filed interrogatories to take discovery from each other prior to the hearing, according to court documents. (It strikes us as bizarre that Sullivan & Cromwell wants to depose what is effectively the U.S. Department of Justice when the DOJ’s criminal investigation into the FTX matter is ongoing.)

Additionally, Sullivan & Cromwell has filed a notice that it plans to call as its witness for the hearing, John J. Ray III, the man it recommended to become the new CEO of the FTX group of companies and who has been functioning in that role for more than two months – hiring new Directors, law firms and advisers.

The position of the U.S. Trustee is that it wants to appoint an independent examiner to conduct the investigation into FTX. According to a court filing, its rationale is 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….”

By calling John Ray to the witness stand, Sullivan & Cromwell may be opening up a hornet’s nest for itself because the U.S. Trustee then has the right to cross examine. The attorney for the U.S. Trustee, Juliet Sarkessian, has demonstrated at a previous hearing that she is quite adept at cross examination.

A big problem for Ray is that a former inhouse attorney for FTX, Daniel Friedberg, has filed a declaration with the court suggesting that Ray is a pawn being used by Sullivan & Cromwell to rubber stamp whatever the law firm wants. Friedberg contradicts the law firm’s prior statement to the court that it was Ray who decided to put the FTX group into bankruptcy, writing that “S&C and Ryne Miller [the General Counsel of FTX.US who was previously a partner at Sullivan & Cromwell] selected this route and chose ‘their guy’ to run it.” The court filing showing that Sullivan & Cromwell got a $12 million retainer for FTX bankruptcy work while Ray got a $200,000 retainer furthers that perception.

The narrative that Ray may simply be rubberstamping the wishes of Sullivan & Cromwell gets further support from the fact that there are plenty of Big Law firms that did no legal work (or no significant legal work) for Sam Bankman-Fried or his companies prior to the bankruptcy filing, and which have big bankruptcy practices. And yet, Ray selected  Sullivan & Cromwell as lead counsel and Quinn Emanuel Urquhart & Sullivan as Special Counsel (to conduct investigations and round up assets) despite the fact that both law firms had been previously retained by Sam Bankman-Fried and did significant legal work for his crypto companies.

Sullivan & Cromwell advised Bankman-Fried personally on a stock transaction involving his purchase of more than half a billion dollars of the publicly-traded stock of the trading app, Robinhood. The monies to fund that transaction came from loans from his hedge fund, Alameda Research, which prosecutors say was looting the funds from FTX customer accounts. The Justice Department has seized those shares.

Sullivan & Cromwell also represented FTX and its related companies in multiple transactions. It acknowledged in a court filing that not only had it collected legal fees and expenses of $8,564,487.50 from FTX and its affiliates over the prior 16 months, plus a $12 million retainer for bankruptcy work, but it is simultaneously outside counsel to four of FTX’s major competitors: BlockFi, Coinbase, Gemini, and Kraken.

At the last FTX hearing in bankruptcy court, the presiding Judge, John Dorsey, appeared to endorse the argument that there are going to be these kinds of conflicts with any large law firm and that Quinn Emanuel, the Special Counsel, could step in where conflicts exist with Sullivan & Cromwell.

But as it turns out, Quinn Emanuel is also stunningly conflicted. In a recent court filing, the law firm has owned up to the following:

“In February 2022, Quinn Emanuel executed engagement letters for the provision of legal services concerning litigation matters with Debtor West Realm Shires, Inc. [a/k/a FTX.US] and its subsidiaries (collectively, ‘WRS’), Debtor Alameda Research LLC [Sam Bankman-Fried’s hedge fund] and various of its subsidiaries (collectively, ‘Alameda Research’), Debtor FTX Trading Ltd. and various of its subsidiaries…Quinn Emanuel subsequently performed legal services for WRS, Alameda Research and FTX Trading. To effect enterprise-wide representation, Quinn Emanuel also executed engagement letters with non-Debtor Samuel Bankman-Fried (‘SBF’) and ‘existing or future entities majority-owned or controlled by [SBF]’…”

Quinn Emanuel then goes on to list an excruciatingly long list of highly awkward legal engagements with Bankman-Fried’s companies, which Damian Williams, the federal prosecutor in charge of the criminal case in New York, has called “one of the biggest financial frauds in American history.” The Quinn Emanuel list reads as follows:

“a. Quinn Emanuel advised the FTX Clients regarding certain intellectual property disputes, employment agreements, and confidentiality requirements, and provided advice concerning general Foreign Corrupt Practices Act compliance. Quinn Emanuel also provided general litigation advice and strategy to FTX Trading regarding cross-border discovery issues, including depositions, subpoenas, and fact-gathering procedures.

“b. Quinn Emanuel advised Alameda Research LLC regarding certain blockchain and cryptocurrency arbitration proceedings, disputes, and litigation. Quinn Emanuel provided factual analysis of certain potential cryptocurrency disputes, including litigation strategy related to international arbitration, and prepared agreements and supporting documentation related to certain of Alameda Research LLC’s cryptocurrency investments.

“c. Quinn Emanuel advised West Realm Shires Inc regarding an antitrust litigation claim and prepared a draft comment letter for potential submission to a rule making agency in support of a non-FTX-related market participant’s exemptive application.

“d. Finally, ending in July, 2022, Quinn Emanuel provided Alameda Research and FTX Trading with advice concerning the chapter 11 cases of Voyager Digital and Celsius.”

Ray’s choice of these two deeply conflicted law firms looks particularly dicey given the fact that on November 10, one day before FTX and its related companies filed bankruptcy, Forbes magazine published a tidy roadmap outlining which law firms had done prior legal work for FTX, based on information provided directly to it by the General Counsel of FTX. The only U.S. law firms listed were as follows (there were a number of foreign law firms):

Fenwick & West

Gibson, Dunn & Crutcher

Hogan Lovells

Morrison Foerster

Paul Hastings

Perkins Coie

Quinn Emanuel Urquhart & Sullivan

Skadden, Arps, Slate, Meagher & Flom

Sullivan & Cromwell

White & Case

Based on research conducted by Wall Street On Parade, we believe that Fenwick & West and Sullivan & Cromwell were heavily engaged with FTX. (See Two Law Firms Played Key Roles in Sam Bankman-Fried’s House of Cards; One Is Now Collecting Upwards of $2,165 an Hour in FTX Bankruptcy Proceedings.)

Big bankruptcy law firms such as the following were not on the Forbes list as having done work for FTX:

Jones Day

Sidley Austin

Weil Gotshal & Manges

If John Ray is his own man, if he conducted proper vetting of the law firms and advisors he hired for FTX, why did he pick two that are so deeply conflicted?