FTX’s bankruptcy law firm, Sullivan and Cromwell, is facing a class-action lawsuit alleging that it was so closely associated with the exchange before its collapse that it should be held partially liable for its actions.
The class action lawsuit focused on the number of times S&C served as outside counsel prior to FTX’s collapse. It is alleged that through these transactions, the law firm gained knowledge of the exchange’s operations and ultimately assisted in the fraudulent conduct.
“FTX Class Member customers lost everything, while S&C was able to gain millions of dollars as a result of the FTX fraud. “S&C served as FTX’s primary legal advisor for 16 months prior to FTX’s collapse, during which time S&C billed approximately $8.5 million in fees.”
The suit alleges that attorney Ryne Miller left S&C in 2021 to join FTX as general counsel and then pushed for the company to send business to S&C as an outside counsel. It claims FTX has signed 20 contracts, including a bid for assets of cryptocurrency exchange Voyager and the acquisition of cryptocurrency exchange LedgerX.
S&C claims that it represented a special purpose vehicle called Emergent, which used FTX customer money to purchase Robinhood stock, while also representing former FTX CEO Sam Bankman-Fried himself.
Citing FTX insiders, the class action lawsuit alleges that Miller was aware of a “backdoor” through which FTX customer funds could flow from the FTX platform to Alameda and provided this information to several individuals at S&C.
The lawsuit also states the amount of money S&C earned from overseeing FTX’s bankruptcy proceedings.
“Since assuming this key role, S&C’s FTX-related revenues have grown to exceed $180 million. That’s 10% of the total revenue the 900-lawyer firm would raise in all of 2022, with paralegals charging $595 per hour. Partners charge up to $2,165 per hour,” it said, citing Bloomberg.
S&C did not immediately respond to a request for comment.
Long-standing concerns about the role of S&C
In January 2023, a number of U.S. senators expressed concerns that S&C was not a disinterested party when it came to exchanges. At that time they It has called for an independent investigator to oversee the investigation into the cryptocurrency exchange collapse.
Around the same time, Bankman-Fried emphasized that he worked in the firm’s offices, claiming that the law firm “was one of the two principal law firms of FTX International and the principal law firm of FTX US prior to the bankruptcy.” He claimed the law firm pressured him to bankrupt the exchange and strong-armed him into naming his preferred CEO, John Ray III.
This issue was raised at a bankruptcy hearing in January 2023, where creditors argued that S&C had its own responsibilities in the bankruptcy case and could be subject to investigation. Despite the objections, the judge approved retaining the law firm for the proceedings. The following month, the request for an independent reviewer was denied.
In January 2024, the Third Circuit Court of Appeals in Philadelphia ruled that FTX must be investigated by an independent investigator. John Ray III’s investigation alone is not enough and an independent investigation could shed new light on cryptocurrency industry practices, one of the appellate judges wrote in a precedent opinion.
Disclaimer: The Block is an independent media outlet delivering news, research and data. As of November 2023, Foresight Ventures is a majority investor in The Block. Foresight Ventures invests in other companies in the cryptocurrency space. Cryptocurrency exchange Bitget is an anchor LP of Foresight Ventures. The Block continues to operate independently to provide objective, impactful and timely information about the cryptocurrency industry. Below are our current financial disclosures.
© 2023 The Block. All rights reserved. This article is provided for informational purposes only. It is not provided or intended to be used as legal, tax, investment, financial or other advice.