By Pam Martens and Russ Martens: February 9, 2023 ~
The shenanigans going on in Judge John Dorsey’s bankruptcy courtroom, which is overseeing the FTX bankruptcy proceedings of Sam Bankman-Fried’s collapsed crypto empire, are reaching levels that should be attracting the attention of federal prosecutors. The head of the newly-created FTX Task Force, U.S. Attorney for the Southern District of New York, Damian Williams, has called the looted FTX customer accounts “one of the biggest financial frauds in American history.”
On Monday, February 6, the lead counsel in the bankruptcy case, Sullivan & Cromwell, and its hand-picked CEO for FTX, John Ray, argued vehemently against the appointment of an independent examiner in the FTX matter. The independent examiner has been requested since December 1 by the U.S. Trustee, who works for the U.S. Department of Justice. Sullivan & Cromwell law partner, James Bromley, and Ray, cited the high cost likely to be charged by the independent examiner as one of their arguments against the appointment.
The very next day, Tuesday, February 7, Sullivan & Cromwell submitted a compensation request for $7.6 million in legal fees for 19 days work in November, plus $105,000 in expenses. As part of those expenses, Sullivan & Cromwell included a request to be reimbursed for $7,202.19 for “Conference Room Dining,” and $1,840.00 for “overtime” meals. Accentuating the increasingly tone deaf nature of this law firm, just a few months ago Sam Bankman-Fried was making headlines for spending $2500 on lavish lunches for himself and staff while his customers’ accounts were being looted.
Bromley, who was so concerned about the cost that might be incurred if an independent examiner was hired, billed at an hourly rate of $2,165 for a total of $381,689.50 in legal fees for the period of November 11 through November 30, 2022. Another Sullivan & Cromwell law partner, Andrew Dietderich, also billed at an hourly rate of $2,165 for a total of $465,042.00 over the same span of time. (Emails recently surfaced in another crypto bankruptcy case where Dietderich had written in an email to a different law firm on November 7 that FTX was “rock solid.” FTX halted customer withdrawals the next day and filed bankruptcy on November 11. See Bombshell Emails Raise Questions about What Sullivan & Cromwell Knew about Fraud at Sam Bankman-Fried’s Crypto Firms.)
As lead counsel in the FTX bankruptcy matter, Sullivan & Cromwell is well aware that the bankruptcy estate is missing $8 billion of looted customer funds. What it bills is highly likely to reduce what the defrauded customers get paid.
Sullivan & Cromwell’s $7.6 million in legal fees for 19 calendar days comes out to $400,000 per day. Annualized, that’s $146 million over the course of a year. The bankruptcy proceeding is expected to last as long as two years.
Another compensation request filed on Tuesday was from a firm advising FTX on restructuring, Alvarez & Marsal. Its legal fees for 20 days in November came in at $5 million while expenses tallied to more than $180,000. Its FTX team devoured meals worth $12,324.88 for which it requested compensation.
Another law firm that has been hired to work on the FTX bankruptcy, ostensibly to handle legal work that Sullivan & Cromwell is too deeply conflicted to handle, is Quinn Emanuel Urquhart & Sullivan. For a span of 51 days ending on December 31, 2022, it requested legal fees of $1.2 million and a little over $4300 in expenses. There was zero request for repayment for meals.
Judge Dorsey did not rule on the request for an independent examiner on Monday, as had been expected. Instead, he called the lawyers, including the lawyer for the U.S. Trustee, into his chambers and, according to reports, told the lawyers to try to reach an agreement. Dorsey likely fears being overturned on appeal if he rules against the U.S. Trustee in one of the largest financial frauds in U.S. history. This could cast a decidedly negative light on the numerous times that this Delaware bankruptcy court’s judges (including Judge Dorsey) have ruled from the bench against appointing an independent examiner, despite legal precedent in published decisions and the clear statutory language.
Another hearing in the FTX bankruptcy was scheduled for yesterday, when Dorsey was expected to announce how the independent examiner issue had been resolved. Instead, the hearing was abruptly cancelled. One item of business that was to be taken up at that hearing was the appointment of the law firm Young Conaway Stargatt & Taylor to serve as Co-Counsel to the Official Committee of Unsecured Creditors. Judge Dorsey signed that order yesterday appointing the firm, despite the cancellation of the hearing. (See Docket entry 657 at this link.) Judge Dorsey worked as a partner for that law firm for 16 years prior to taking his seat on the bench.
Sullivan & Cromwell has come under withering criticism for serving as lead counsel in the bankruptcy despite voluminous conflicts of interest from its prior work for FTX, Sam Bankman-Fried and the hedge fund through which he allegedly looted the FTX customer accounts, Alameda Research.
The recently surfaced email by Sullivan & Cromwell partner Andrew Dietderich, in the bankruptcy case of Voyager Digital, means that Dietderich could be called as a witness. Sullivan & Cromwell is also fighting a subpoena from law firms Boies Schiller Flexner and The Moskowitz Law Firm. The law firms want troves of documents and depositions from Sullivan & Cromwell over the work they did for FTX and Alameda in the Voyager Digital case.
This is likely to mean that Sullivan & Cromwell will find itself in the problematic position of attempting to be both witness and advocate – which could potentially create unnecessary delays and billings to the FTX bankruptcy estate.
It’s not like Judge Dorsey wasn’t warned about this problem. In a letter sent to him on January 9, four sitting U.S. Senators – including bankruptcy law expert Elizabeth Warren – warned as follows:
“To name just one challenge: will the firm’s lawyers be able to effectively investigate their current and former partners who were central in FTX’s conduct? Additionally, given their longstanding legal work for FTX, they may well bear a measure of responsibility for the damage wrecked on the company’s victims. Put bluntly, the firm is simply not in a position to uncover the information needed to ensure confidence in any investigation or findings.”
An FTX customer, Warren Winter, also filed a formal objection to the appointment of Sullivan & Cromwell, telling the court:
“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’….”
Despite the warnings, Judge Dorsey signed an order on January 20 making Sullivan & Cromwell lead counsel in the FTX bankruptcy.
It’s time for disinfecting sunshine on what’s going on in this courthouse. We urge our colleagues at mainstream business media to wake from their slumbers and provide it.