A U.S. Trustee with the Department of Justice (DOJ) has filed an objection to Sullivan & Cromwell working as lead counsel for FTX in bankruptcy proceedings. Sam Bankman-Fried, the former CEO of crypto exchange FTX, wrote in a Substack post that he sees Sullivan & Cromwell's current work for FTX as a potential conflict of interest, given the law firm's previous work for FTX. A bipartisan group of U.S. senators recently expressed the same concern.
Cryptonews reported that on Jan. 13, Andrew Vara, U.S. Trustee for Regions Three and Nine, filed an objection in U.S. Bankruptcy Court for the district of Delaware opposing FTX's application to use the law firm Sullivan & Cromwell (S&C) to lead investigations into the collapse of the crypto trading platform, according to court documents.
Vara cited two main reasons for the objection. The first is that S&C's disclosures "are wholly insufficient to evaluate whether S&C satisfies the Bankruptcy Code’s conflict-free and disinterestedness standards." The court documents state that this reason alone would be enough to deny the application. The second reason listed in the document cites Bankruptcy Code sections 1106(a)(3) and 1107(a), which state that debtors cannot investigate themselves, but S&C has a "close connection" with the debtors (FTX).
Bankman-Fried highlighted the potential conflict of interest between S&C and FTX in a Jan. 12 post on Substack.
"Contrary to S&C’s statement that they 'had a limited and largely transactional relationship with FTX,' S&C was one of FTX International’s two primary law firms prior to bankruptcy, and was FTX US’s primary law firm," Bankman-Fried wrote. "FTX US’ GC came from S&C, they worked with FTX US in its most important regulatory application, they worked with FTX International on some of its most important regulatory concerns, and they worked with FTX US on its most important transaction. When I would visit NYC, I would sometimes work out of S&C’s office.
"S&C and the GC were the primary parties strong-arming and threatening me into naming the candidate they themselves chose as CEO of FTX – including for a solvent entity in FTX US – who then filed for Chapter 11 and chose S&C as counsel to the debtor entities."
According to Cryptonews, the DOJ court filing came days after a group of senators expressed the same concern. Senators John Hickenlooper (D-Colo.), Thom Tillis (R-N.C.), Elizabeth Warren (D-Mass.) and Cynthia Lummis (R-Wyo.) wrote a letter to Judge John Dorsey of the U.S. Bankruptcy Court for the District of Delaware, asking him to appoint an independent investigator to look into FTX's activities that led to its November collapse.
"We believe it is critical that a strong, objective and disinterested examiner is appointed in this case to conduct a searching investigation of FTX, FTX US and its related entities in order to uncover the facts needed to assure FTX’s customers – and the broader public – that justice is served and to inform Congress’ consideration of future digital asset legislation,” the senators wrote.
The senators noted that in light of S&C's extensive previous legal work for FTX, the law firm "may well bear a measure of responsibility for the damage wrecked on the company’s victims," Bloomberg Law reported. Court filings have revealed that in the 16 months prior to FTX's bankruptcy filing, S&C earned approximately $8.5 million for its work related to transactions and regulatory inquiries for FTX.
FTX has recovered approximately $5 billion that could be put toward repaying creditors, but an FTX adviser said it is not yet clear what the total settlement fund for creditors will be, according to Crypto News.
