By Pam Martens and Russ Martens: January 10, 2023 ~
Sullivan & Cromwell ranks among the oldest law firms in America. It was founded 144 years ago by Algernon Sydney Sullivan and William Nelson Cromwell in Manhattan’s financial district. During the financial bust in the 1930s, Sullivan & Cromwell garnered its reputation for defending Wall Street firms against shareholder lawsuits and antitrust actions. As Wall Street On Parade previously detailed, the firm’s Senior Chairman, Rodge Cohen, paved the way for the Fed’s unprecedented $29 trillion bailout of Wall Street banks after their corrupt activities collapsed the U.S. economy in 2008.
And, of course, there was S&C partner Jay Clayton, who was tapped by President Donald Trump to Chair the SEC – and, in our opinion, left markets mired in the worst corruption since 1929.
Against that backdrop, one would think that S&C would be attempting to stay off the radar screen of federal regulators and prosecutors. Instead, it has steamrolled its way into Lead Law Firm for bankruptcy proceedings of one of the largest financial frauds in U.S. history according to federal prosecutors – the collapse of Sam Bankman-Fried’s crypto exchange, FTX. According to the new CEO of FTX, John Ray, $8 billion of customers’ money is missing.
On December 21, FTX and its related bankrupt companies, filed a request with the Bankruptcy Court in Delaware to name Sullivan & Cromwell as the lead law firm for the bankruptcy proceedings. Included in that request was a Declaration from S&C law partner, Andrew (Andy) Dietderich. In that declaration, Dietderich stated that “S&C does not represent any person or entity having an interest adverse to the Debtors.” But in that same document, Sullivan & Cromwell provides a list of its current clients who have a relationship to FTX, as well as a list of former clients who had a relationship to FTX.
Stunningly, included on the list of Sullivan & Cromwell’s current clients are four crypto exchanges that are major competitors to FTX. Those competitors are BlockFi, Coinbase, Gemini, and Kraken. Clearly, a major competitor would logically seem to have a built-in motive to see its competitor fail rather than be resuscitated in bankruptcy proceedings.
Adding to the unseemliness of the situation, on December 7, Bloomberg News reported that the incoming CEO of Kraken, Dave Ripley, called FTX mastermind, Sam Bankman-Fried, a “fraudster,” while adding that “We have information to know that fraud was committed there.”
Two days later, on December 9, the New York Post reported that Coinbase CEO, Brian Armstrong, was blasting the media for being too soft on Sam Bankman-Fried, stating that “I mean, this guy just committed a $10 billion fraud, and why is he getting treated with kid gloves?” (Bankman-Fried has pleaded not guilty to an 8-count criminal indictment brought by the U.S. Attorney’s Office for the Southern District of New York. His trial is scheduled for October.)
In addition to representing two crypto exchange competitors whose CEOs are using the media to bash the former CEO of FTX, Sullivan & Cromwell’s crypto client, BlockFi, has filed a lawsuit arguing that approximately $440 million of shares in stock-trading platform, Robinhood, belong to it as collateral for loans it made to FTX. At the same time, the bankruptcy team for FTX is arguing that the Robinhood shares belong to a related FTX company, Alameda Research, which is also in bankruptcy, and it needs to hold onto the stock while investigating other disputed claims to the shares. (One of those disputed claims has emerged as coming from Sam Bankman-Fried, who says he needs the Robinhood stock to pay his legal defense team.)
Adding to the Sullivan & Cromwell rabbit hole of conflicts, Sam Bankman-Fried was previously its client according to its recently filed document with the Delaware Bankruptcy Court. Robinhood itself is listed as a current client to Sullivan & Cromwell.
Adding to Sullivan & Cromwell’s tenuous claims to the bankruptcy court that it “is not aware of any conflict between its representation of the Debtors and its representations of its Current Clients or Former Clients that would cause S&C not to be a ‘disinterested person,’” are the large legal fees it had been collecting from FTX during a period when federal prosecutors say FTX was looting its customer accounts and Sam Bankman-Fried was using the money as his personal piggy bank.
According to the S&C document filed with the bankruptcy court, prior to it filing the FTX bankruptcy petition, Sullivan & Cromwell collected a “retainer in the amount of $12 million” from the parent of FTX.US. Sullivan & Cromwell further notes in its filing that it received legal fees and expenses totaling $8,564,487.50 from FTX and its related companies from July 2021 to the Petition Date of November 11, 2022.
Sullivan & Cromwell has asked the court to bill as follows going forward: “from $1,575 to $2,165 per hour for partners and special counsel, $810 to $1,475 per hour for associates and $425 to $595 per hour for legal assistants.”
Adding further to the sinking ground on which Sullivan & Cromwell finds itself, a draft of the testimony that Sam Bankman-Fried was set to deliver before the House Financial Services Committee on December 13 (which never materialized because he was arrested on that date), claims that Sullivan & Cromwell used undue pressure tactics to get him to file for Chapter 11 bankruptcy. Bankman-Fried writes:
“Most of that pressure came from Ryne Miller, the General Counsel of FTX US and a former partner at Sullivan & Cromwell (S&C), and Sullivan and Cromwell itself. 2) Sullivan & Cromwell was one of the primary external law firms that represented FTX US as well as FTX International at the time. a) I have 19 pages of screenshots of Sullivan & Cromwell, Mr. Miller, and others I believe were influenced by them, all sent over a two day period, pressuring me to quickly file for Chapter 11. They range from adamant to mentally unbalanced. They also called many of my friends, coworkers, and family members, pressuring them to pressure me to file, some of whom were emotionally damaged by the pressure. Some of them came to me, crying. b) It was only later that I was informed that it was very unusual for such a significant filing to be made so quickly. 3) Sullivan & Cromwell chose John Ray to run the Chapter 11 team.”
John Ray is not just running the Chapter 11 team. Ray has been named as the new CEO of FTX. According to Bankman-Fried’s draft testimony to the House Financial Services Committee, “S&C chose John Ray as the new CEO of the Chapter 11 estate; John Ray then chose S&C to represent the Chapter 11 estate.”
While Bankman-Fried has not particularly built up a reputation for truth-telling, the assertion that S&C picked the new CEO is supported by the fact that there was no proper corporate mechanism at the time to pick a new CEO. According to John Ray’s testimony to Congress, there was no functioning Board of Directors at FTX.