An investigation into Sullivan & Cromwell’s connection with FTX is set to test the elite Wall Street firm’s claim that its ties to the crypto exchange before the bankruptcy were minimal.
US Bankruptcy Judge John Dorsey has authorized former Unabomber prosecutor Robert Cleary to investigate whether Sullivan & Cromwell’s work for FTX and its former leader Sam Bankman-Fried posed conflicts of interest during the Chapter 11 proceedings. The firm has billed over $170 million to the FTX estate since the bankruptcy.
Georgetown Law ethics counsel Michael Frisch stated, “A lawyer is obligated to provide undivided loyalty and impartial advice to the beneficiary of the work. Did the lawyer have any undisclosed interest that compromised the ability to provide impartial advice? That is the key question.”
Cleary’s investigation comes in light of increased scrutiny facing Sullivan & Cromwell due to its involvement with FTX. An investor lawsuit filed in February accuses the firm of aiding FTX schemes before its collapse, and a recent paper by two law professors questions the firm’s statements leading up to the bankruptcy.
The paper suggests that Sullivan & Cromwell may have used deceptive tactics to take control of FTX from Bankman-Fried. Sullivan & Cromwell previously stated that it had a limited relationship with FTX before the bankruptcy.
FTX responded by accusing academics and others of echoing Bankman-Fried’s false narratives in an attempt to improve his image. FTX claims that without the work of advisors like Sullivan & Cromwell, recoveries for customers would have been significantly lower.
FTX and its affiliates filed for bankruptcy in November 2022, listing $10 billion in assets and liabilities. Bankman-Fried was convicted of multiple charges a year later and is set to be sentenced in March.
Cleary’s Investigation
Judge Dorsey has granted Cleary permission to conduct the investigation, with a report expected within two months. The US Trustee has pushed for this independent probe since the beginning of the bankruptcy.
Cleary, a former US Attorney, will examine potential conflicts of interest related to Sullivan & Cromwell’s work for FTX and whether important details were omitted during the firm’s application to be lead counsel.
The investigation will also look into past investigations by FTX’s new management, creditors, and regulators, as well as potential fraudulent activities involving FTX’s native token, FTT.
Sullivan & Cromwell’s Work
Sullivan & Cromwell started working for FTX after a former partner joined the company as general counsel. The firm earned over $8 million for its work on FTX matters before the bankruptcy.
The firm has defended its high fees, stating that the costs will be justified by the eventual recoveries for customers and creditors. Sullivan & Cromwell is among the institutions facing a lawsuit from investors with ties to FTX.