Serious New Issues Emerge in Sullivan & Cromwell’s Deeply Conflicted Role in the FTX Bankruptcy Case

By Pam Martens and Russ Martens: January 26, 2023 ~

Marshal Hoda

Marshal Hoda, Attorney for Two Customers in the FTX Bankruptcy Case

We don’t know what kind of legal kryptonite the University of California, Berkeley, School of Law is bestowing on its graduates but one young alumnus appears to be fearless about whom he takes on.

Marshal Hoda, the young attorney from a one-man office in Houston, who is representing two customers of the collapsed FTX crypto exchange, tested out his super powers in a January 20 hearing in the U.S. Bankruptcy Court in Delaware. Hoda is pitched against the 900-attorney Big Law firm of Sullivan & Cromwell in one of the most closely-watched (and bizarrely conflicted) bankruptcy cases in U.S. history.

Co-counsel with Hoda for the two customers are John D. McLaughlin, Jr. of Ferry Joseph, P.A. and Patrick Yarborough of Foster Yarborough, PLLC.

During the hearing, Hoda admonished Sullivan & Cromwell with this: “When you find yourself in a hole, stop digging.” Hoda also accused the 144-year old law firm of “gamesmanship” over its serial delays in advising the court of its seemingly endless conflicts in the matter. Those jabs came on the heels of one of Hoda’s clients, Warren Winter, berating Sullivan & Cromwell as follows in a court filing:

“Sullivan & Cromwell was one of the FTX Group’s ‘primary external law firms’ before the FTX Group collapsed. To date, the FTX Group has paid the firm more than $20.5 million in fees and retainers. Now, in the most flagrant attempt by a fox to guard a henhouse in recent memory, Sullivan & Cromwell has applied to be appointed the FTX Group’s bankruptcy counsel with duties that would include ‘investigating all potential estate causes of action.’ But it has revealed almost nothing about its prepetition work for Sam Bankman-Fried’s fraudulent enterprise — and failed to disclose or elided glaring conflicts of interest.”

The bankruptcy case involves the international crypto exchange,, its US counterpart, its more than 100 opaque affiliates, along with Alameda Research, the hedge fund of FTX’s former CEO and co-founder, Sam Bankman-Fried. According to an 8-count criminal indictment handed down by federal prosecutors, Sam Bankman-Fried looted customer accounts at FTX, diverted the funds to his hedge fund, Alameda, and then used those funds for a multitude of illegal purposes. John J. Ray III, the new CEO of FTX, told a House panel in December that at least $8 billion in customer funds are missing.

What makes this bankruptcy case so bizarre is that the presiding Judge, John Dorsey, has had Sullivan & Cromwell’s mountain of conflicts placed directly under his nose by the gutsy Marshal Hoda and his co-counsel; four sitting U.S. Senators; a former FTX in-house attorney, Daniel Friedberg, in a bombshell sworn declaration; and by the U.S. Trustee in the case (who represents the U.S. Department of Justice in bankruptcy cases). The U.S. Trustee warned Dorsey as follows in an objection filed on January 13:

“The U.S. Trustee objects to the S&C Application for two overarching reasons. First, S&C’s disclosures as filed are wholly insufficient to evaluate whether S&C satisfies the Bankruptcy Code’s conflict-free and disinterestedness standards. The incomplete disclosures are a sufficient and independent reason to deny the application. Nevertheless, publicly available information thus far raises the specter that S&C may have a conflict or not be disinterested given that an S&C partner of eight years became general counsel for certain of the Debtors approximately 14 months before the petition date. Second, the scope of S&C’s retention cannot be allowed as proposed. Bankruptcy Code sections 1106(a)(3) and 1107(a) specifically preclude debtors in possession from investigating themselves, which is exactly what the Debtors propose in the S&C Application. S&C’s close connection with an insider of the Debtors also renders S&C too conflicted to investigate Debtors’ downfall. And any investigation led by S&C would be duplicative and wasteful of estate resources if the Court were to grant the U.S. Trustee’s pending motion to appoint an examiner with a comprehensive investigative mandate.”

But as if this Judge is living in some alternative universe with different bankruptcy laws, Judge Dorsey approved Sullivan & Cromwell as lead counsel at the January 20 hearing.

The ink on the Judge’s order was barely dry before more conflicts involving Sullivan & Cromwell raised their ugly head, as we knew they would.

According to one of the delayed disclosures submitted by Sullivan & Cromwell, it provided personal legal advice to Sam Bankman-Fried less than four months before FTX filed bankruptcy. To put that another way, the man federal prosecutors have accused of masterminding “one of the biggest financial frauds in American history” was the recent personal client of the law firm that will now oversee recouping monies from his thefts. (Bankman-Fried has also written that he worked out of Sullivan & Cromwell’s offices when he visited New York City. We asked, via email, three Sullivan & Cromwell partners involved in the bankruptcy case, as well as the two co-chairs of the firm, to confirm or deny that. We received no response.)

According to the long overdue filing of its conflicts, with specificity, by Sullivan & Cromwell law partner Andrew Dietderich, filed with the court on January 17 – just three days before the January 20 hearing – Sullivan & Cromwell’s representation of Bankman-Fried “commenced on April 14, 2022 and ceased on August 5, 2022.” Sullivan & Cromwell’s disclosure also offers this: “This matter was arranged, and paid for, by Alameda.” As we explained earlier, Alameda is Sam Bankman-Fried’s hedge fund that federal prosecutors say was looting customer funds from FTX during that timeframe. The nature of the work that Sullivan & Cromwell performed personally for Bankman-Fried, according to the Dietderich declaration, involved “a position that had been established in the stock of Robinhood Markets, Inc.” – a stock trading app that has had plenty of its own scandals.

“Had been established” in the above paragraph is not accurate. According to SEC records, Bankman-Fried was purchasing Robinhood stock through the month of April and May 2022, during which period he was represented by Sullivan & Cromwell according to their own bankruptcy court filing.

According to a public statement issued by Sullivan & Cromwell, Robinhood was also their client while it was advising Sam Bankman-Fried on his position in the company’s stock. The law firm wrote on April 18, 2022:

“S&C Advises Robinhood in $2.275 Billion Secured Revolving Credit Facility

“Robinhood Securities, a clearing broker-dealer entity and a wholly owned subsidiary of Robinhood Markets, entered into an agreement in which a syndicate of banks led by JP Morgan Chase will provide Robinhood with a secured revolving credit facility of up to $2.275 billion.”

According to the statement, seven attorneys at Sullivan & Cromwell worked on the $2.275 billion credit facility for Robinhood.

Now this is where you have to pay close attention. Sam Bankman-Fried’s stock purchase in Robinhood was not a flimsy 1,000-share position. It was not even a 10,000-share position. It was an enormous 56,273,469 shares with a current market value (at yesterday’s closing price) of $545,289,914 – more than half a billion dollars. And it was purchased with loans taken from Alameda Research, which prosecutors allege was using stolen FTX customer funds.

Now, as Sullivan & Cromwell has put pen to paper to confirm, it advised Bankman-Fried on this stock transaction. And, as everyone on Wall Street knows, Sullivan & Cromwell is highly sophisticated in such matters. So wouldn’t one think that large block trades would have been arranged with sophisticated financial institutions to acquire a position of 56 million shares?

Instead, something unusual happened, according to this filing with the Securities and Exchange Commission by former Sullivan & Cromwell partner, Ryne Miller, who had become General Counsel of FTX.US in August of 2021 according to his LinkedIn profile page.

The Robinhood stock was purchased and then held through a company set up in Antigua and Barbuda (Emergent Fidelity Technologies Ltd.) in which Sam Bankman-Fried was the majority owner. Bankman-Fried didn’t acquire the stock position in a few large block trades but instead made purchases on 29 separate trading days from March 14, 2022 through May 11, 2022. The number of shares purchased on any one day ranged from a low of 400,000 shares to a high of 2.8 million shares on May 3 and May 10.

Robinhood’s stock was tanking when Bankman-Fried decided to become a big buyer. Robinhood’s shares went from more than $16 in late March to $8 and change on May 11. His large purchases, clearly, helped support the stock price.

Equally concerning, the SEC filing made by Ryne Miller does not show the trading dates and amounts for all 56 million shares but just the details for 29,888,469 shares. (You can tally the “Quantity” column at this link to see what we mean.) Did Bankman-Fried escalate his daily purchases in Robinhood stock after this date? The public is left in the dark in terms of seeing the full picture of what went on here.

One thing the public does know is this: the U.S. Department of Justice is not leaving it up to Sullivan & Cromwell to safeguard this half a billion dollar stock position. The Justice Department has seized the stock.

Something else the public knows is that the federal prosecutors in the Southern District of New York made reference to securities fraud involving an unnamed stock purchased by Sam Bankman-Fried in May of 2022 in their indictment against him. Prosecutors wrote in Count Six of the indictment:

“From at least in or about May 2022, up to and including in or about November 2022…Sam Bankman-Fried…and others known and unknown…to commit an offense against the United States, to wit, securities fraud.”

The indictment goes on to explain that one element of this securities fraud involved the use of a “national securities exchange.” Neither FTX nor any of its affiliated bankrupt companies have ever publicly traded so it’s not FTX that is being referred to in this particular passage. While the indictment does not include the name of the stock the prosecutors are referring to, Robinhood does trade on Nasdaq, a national securities exchange and, indeed, the Justice Department has seized the stock.

For more on the spiraling conflicts Judge Dorsey is tolerating with Sullivan & Cromwell, see our prior reports: A Sam Bankman-Fried Company Loaned or Invested More than $1 Billion in Clients of its Law Firm, Sullivan & Cromwell and Sullivan & Cromwell, FTX Lead Counsel in Bankruptcy, Says It Has No Adverse Relationships, Despite Representing Four of FTX’s Crypto Exchange Competitors.

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