Bombshell Emails Raise Questions about What Sullivan & Cromwell Knew about Fraud at Sam Bankman-Fried’s Crypto Firms

By Pam Martens and Russ Martens: February 6, 2023 ~

Andrew (Andy) Dietderich, Law Partner at Sullivan & Cromwell

Andrew (Andy) Dietderich, Law Partner at Sullivan & Cromwell

Just four days before Sam Bankman-Fried’s crypto exchange, FTX, collapsed into bankruptcy, Sullivan & Cromwell law partner Andrew (Andy) Dietderich sent an email to an attorney representing Voyager Digital’s Official Committee of Unsecured Creditors in its bankruptcy proceedings, stating that FTX was “rock solid.” At the time, Sullivan & Cromwell was representing FTX in a very aggressive move to purchase $1 billion of Voyager’s crypto assets.

The law partner representing the Voyager creditors was Darren Azman of law firm McDermott Will & Emery. The email exchange on November 7, 2022 went as follows, according to exhibits McDermott Will & Emery submitted to the Voyager bankruptcy court in the Southern District of New York last week:

Azman: “We are getting a lot of inbounds regarding liquidity issues at FTX/Alameda. We also had a lot of leftover questions from the last town hall. I’m thinking we’d like to do another one next week and would like you for your team to be a part of it. We can’t be silent on these issues and I don’t want to speak for FTX. Let me know your thoughts on timing and who on your side would be best to join and handle FTX-related questions.”

Dietderich of Sullivan & Cromwell responded the same day as follows:

Dietderich: “That’s just Binance silliness. FTX is rock solid, doesn’t use customer funds or take credit risk at all. It cannot have ‘liquidity’ issues because it doesn’t lend.”

The very day after Dietderich sent that “rock solid” email, FTX halted customer withdrawals on November 8. On November 11, FTX and more than 100 of its opaque crypto companies filed for Chapter 11 bankruptcy.

And from day one of that FTX bankruptcy filing, Sullivan & Cromwell has been calling the shots and aggressively pushing to become lead counsel in the bankruptcy proceedings – which it accomplished on January 20 with an order signed by the presiding Judge, John Dorsey. The Judge’s order came despite overwhelming evidence that Sullivan & Cromwell was deeply conflicted in the FTX matter.

Federal prosecutors have indicted Sam Bankman-Fried and two of his first lieutenants, Caroline Ellison and Gary Wang. Bankman-Fried has pleaded not guilty while Ellison and Wang have pleaded guilty and are cooperating with prosecutors. According to the criminal indictments and civil cases brought by securities regulators, Bankman-Fried’s hedge fund, Alameda Research, was being used by the top executives to loot billions of dollars of FTX customer funds. The new CEO at FTX, John Ray, testified to the House Financial Services Committee on December 13 that $8 billion of customer funds are missing.

The Sullivan & Cromwell emails surfaced last week in the Voyager Digital bankruptcy case because the Voyager creditor’s committee, represented by Azman and his colleagues at McDermott Will & Emery, are objecting to creditors’ claims made by FTX and Alameda Research (which they refer to as the “FTXAlameda criminal enterprise”) on the basis that FTXAlameda set out to perpetrate a big fraud on Voyager.

The objection alleges the following: (Document 936 on Court Docket.)

“AlamedaFTX is now a notorious criminal enterprise that stole its customers’ crypto to pay company debts, cover investment losses, fund secret political donations, make loans to senior executives, and expense a series of vanity projects. What is not as heavily publicized is the scheme AlamedaFTX, Bankman-Fried, and others perpetrated against Voyager and its creditors leading up to and during these Chapter 11 Cases. While AlamedaFTX was secretly struggling financially and using customer crypto to cover losses, AlamedaFTX set its sights on the crypto held by the bankrupt Voyager to keep its fraud going.

“In connection with its attempts to buy Voyager, AlamedaFTX made a series of false statements indicating that it was financially strong and able to consummate the Voyager purchase. AlamedaFTX falsely represented that it had a ‘bottomless sea of ordinary cryptocurrency….’ ”

McDermott Will & Emery, on behalf of the creditors, allege the following was really happening at AlamedaFTX in the months before it filed bankruptcy:

“When crypto companies began to falter in May 2022, Bankman-Fried and AlamedaFTX began a self-aggrandizing campaign purporting to invest in and purchase struggling crypto companies. It was later revealed, however, that ‘he was pursuing an aggressive acquisition strategy during this time at least in part to gain access to additional sources of capital that could be used to help support his existing businesses and fill the hole in the customer assets that had been created.’ AlamedaFTX’s attempted acquisition of Voyager was part of this strategy.”

The quote in the above paragraph referring to “fill the hole in the customer assets” comes from the complaint filed by the Commodity Futures Trading Commission, a federal regulator.

McDermott Will & Emery also allege the following:

“AlamedaFTX made a number of representations and warranties in the Amended FTX APA [Asset Purchase Agreement], all of which we know now were completely false, including, without limitation, that (a) there were ‘no facts or circumstances exist that would reasonably be expected to impair or materially delay the ability of [AlamedaFTX] to consummate the transactions contemplated by this Agreement,’ (b) AlamedaFTX was ‘not in violation of any Laws or Orders applicable to the conduct of its business,’ and (c) AlamedaFTX had the financial wherewithal to close the sale…

“Importantly, beyond mere bad faith and close dealing, this signed submission constitutes direct fraud on this court, a crime under federal law. Section 157(2) of title 18 of the United States Code criminalizes filing a document in the bankruptcy with the intent to execute or conceal fraud.”

Sullivan & Cromwell was the legal advisor to AlamedaFTX on its efforts to purchase crypto assets from Voyager. Dietderich confirmed that fact in a declaration he made to the Delaware bankruptcy court overseeing the FTX bankruptcy on January 17. Dietderich also revealed what Sullivan & Cromwell charged AlamedaFTX for that legal advice: “fees and expenses received for this matter were approximately USD $3,128,000.”

Voyager filed Chapter 11 on July 6, 2022. The very next day, July 7, Sullivan & Cromwell’s law partners filed a notice of appearance.

The Dietderich declaration on January 17 also revealed that Sullivan & Cromwell had personally represented Sam Bankman-Fried (the former FTX CEO who is now charged in an eight-count criminal indictment by the U.S. Department of Justice). That engagement “commenced on April 14, 2022 and ceased on August 5, 2022.” It involved “a position that had been established in the stock of Robinhood Markets, Inc.” According to the Securities and Exchange Commission timeline, Bankman-Fried was purchasing Robinhood stock through at least the month of April and May 2022, the period in which Sullivan & Cromwell says they were representing him in this matter.

Bankman-Fried purchased more than half a billion dollars of Robinhood stock – a total of 56,273,469 shares. And, it was purchased with loans Bankman-Fried took from Alameda Research, which federal prosecutors allege was using stolen FTX customer funds. 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.

In the criminal proceedings against Bankman-Fried taking place in the U.S. District Court for the Southern District of New York, federal prosecutors filed a letter providing more background on why they seized the Robinhood stock. They wrote:

“…the defendant [Sam Bankman-Fried] moved to take control of approximately $500 million of Robinhood shares that were purchased using misappropriated FTX customer funds by a special purpose entity owned primarily by the defendant. The Government has since seized the shares after demonstrating probable cause to believe that they are the proceeds of wire fraud and are property involved in money laundering. Since the Government’s seizure, the defendant has claimed that he would direct the majority of these funds toward making customers whole, but the original circumstances of the purchase of these shares, through a foreign special purpose vehicle with no public connection to FTX or Alameda, further indicate the steps the defendant has taken to obscure his criminal misuse of FTX customer property.”

The overarching questions here are what did Sullivan & Cromwell know about these frauds and when did they know it; and in what alternative universe from hell would Sullivan & Cromwell qualify as a disinterested party eligible to serve as lead counsel in the FTX bankruptcy proceedings?

This morning, beginning at 9:30 a.m., the bankruptcy court in Delaware will hear arguments from the U.S. Trustee, who represents the Justice Department, as to why an independent examiner must be appointed in the FTX matter. Sullivan & Cromwell has aggressively fought the appointment of an independent examiner.

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