Financial Times: How a Famous Wall Street Law Firm Got Caught Up in the FTX Scandal?

Original authors: Sujeet Indap, Joshua Oliver
Original title: How a prestigious Wall Street law firm got caught up in FTX's chaos Translation: Qianwen, ChainCatcher

Algernon Sydney Sullivan and William Nelson Cromwell founded their eponymous law firm Sullivan & Cromwell in 1879, which has since become the firm of choice for some of the world's largest companies, including General Electric and Goldman Sachs.

In 2021, this law firm, which focuses on providing high-end services, began working with an entrepreneur who was completely at odds with its Wall Street headquarters in both image and fact. However, some believed he could become the next global financial titan. FTX, headquartered in the Bahamas, was a very young company at the time. The cryptocurrency industry was on the rise, and SBF was emerging with his quirky yet popular persona.

Over the next 16 months, Sullivan executed multiple tasks for FTX, earning $8.6 million in fees. The firm may now receive tens of millions of dollars in "windfall" as it helps guide the troubled FTX through bankruptcy without the involvement of its founder, with the fees to be paid from the bankruptcy estate.

According to American Lawyer, the profits Sullivan gained from FTX's rise and fall did not constitute a significant portion of its total revenue of $1.7 billion in 2021. However, its role in the rescue operation and its connection to FTX have sparked calls for scrutiny of the firm's dealings with the now-troubled fintech company.

On Friday, a federal bankruptcy judge allowed FTX's new management to hire Sullivan as chief bankruptcy counsel, swiftly dismissing objections that the firm was tainted by its existing relationship with the cryptocurrency company and could not impartially investigate the alleged wrongdoing. FTX's new head, John Ray III, expressed his eagerness to begin working with Sullivan to start returning funds to account holders.

Sullivan's appointment may raise concerns among some investors who question whether they should have noticed certain red flags earlier. Harvard Law School professor and former bankruptcy lawyer Jared Ellias said, "As this case progresses, many wealthy institutions and other authorities will soon have to answer this question in some way."

Sullivan's Connection to FTX

According to a former employee, Sullivan remained conservative as cryptocurrency began to go mainstream. The firm, which has 900 lawyers and is headquartered in Manhattan's financial district, even prohibited its lawyers from owning cryptocurrency. Initially cautious, the firm later found itself approached by blue-chip startups, including Coinbase, DCG, Galaxy, Gemini, and FTX, which began to interact with financial regulators and trading partners, thus requiring consulting services.

The relationship between Sullivan and FTX began in July 2021 when the law firm was invited to provide advice for a small acquisition. One of Sullivan's partners, Ryne Miller, had just left the firm to become the general counsel of the cryptocurrency exchange.

Sullivan subsequently participated in several tasks, including advising FTX on its acquisition of the bankrupt cryptocurrency exchange Voyager Digital. The law firm even assisted in FTX's copyright dispute with the hamburger chain "Jack in the Box," as the fast-food group claimed that the "moon man" appearing in the cryptocurrency company's advertisements was a copy of its mascot, Jack. FTX was required to pay $55,000 for this work.

According to a former FTX employee, the choice of the firm was due to its expertise in regulatory matters. It assisted FTX in handling inquiries from regulators who wanted to know whether U.S. users were improperly accessing the cryptocurrency exchange's international platform. It also helped formulate FTX's groundbreaking proposal to U.S. regulators regarding the automation of financial market risk management. When FTX faced a bank run in the first week of November, Miller immediately sought out Sullivan for advice on how to respond.

Even after participating in a dozen tasks, the firm seemed unaware that FTX had become a hotbed of criminal activity and that the situation was dire. According to an insider, Sullivan never worked with FTX to raise new funds and thus did not have access to private information shared with investors, including financial information. Therefore, the law firm had no reason to question its cryptocurrency client's market value or financial condition.

Sullivan declined to comment.

Restructuring Advisors Under Scrutiny

To some extent, Sullivan is the ideal law firm to pursue and investigate the billions of dollars in cryptocurrency scattered around the world. Its primary business is banking, financial services, and financial regulation, and many of its senior partners are former regulators.

Ray acknowledged in a court filing that given FTX's crisis in early November, there was no time to interview other law firms to serve as bankruptcy advisors, so he preferred to start working immediately with Sullivan and its lawyers who were already familiar with the situation. Typically, bankrupt companies can choose their advisors as long as there are no significant conflicts of interest. In a 58-page application submitted to the court in December, Sullivan mentioned that its partners could charge over $2,000 per hour and had some existing connections with FTX—but it stated that there were no conflicts of interest.

In recent years, the challenges posed by restructuring advisors have come under scrutiny, as a few elite firms often dominate large cases. For example, consulting giant McKinsey reached a $15 million settlement with the U.S. Department of Justice in 2019 after being accused of failing to adequately disclose potential conflicts when seeking repayment of its fees in a case.

Opposition to Sullivan's work in the FTX bankruptcy case has come from various quarters, including the U.S. Trustee Program under the Department of Justice and four U.S. senators. They argue that the firm did not clearly disclose its relationship with FTX's general counsel Miller, who was a partner at Sullivan before joining the cryptocurrency exchange, and that the law firm may ultimately have to investigate its own internal conduct.

Much of the criticism can be articulated in straightforward bankruptcy law terms, but there are also voices from FTX account holders, one of whom wrote in a court filing that "Sullivan & Cromwell's involvement in the criminal activities of the FTX group must be investigated and may require accountability."

The most prominent opponent of this move is SBF himself, who criticized the new FTX regime on Twitter and Substack while denying that Sullivan had no close ties with him before the collapse of the crypto empire. SBF now faces criminal charges and insists he was coerced by Sullivan and Miller into filing for bankruptcy, even as he claims he was working to raise new funds to save the company.

Another member of FTX, Daniel Friedberg, criticized Sullivan in a last-minute court filing, stating that Miller had told him he wanted to funnel business to Sullivan and that he "looked forward to returning as a partner" after serving at the cryptocurrency group.

After the U.S. Trustee Group raised objections, Sullivan submitted a more detailed disclosure regarding its relationship with FTX, asserting that the 20 tasks it undertook were "special, discrete, and unique," and that the cryptocurrency group was never internally classified as a "regular" client.

As for other allegations, the law firm has denied them. The firm's top bankruptcy lawyer, Andrew Dietderich, has stated that he was not deeply involved with the cryptocurrency exchange, claiming he had only spoken with SBF twice. Sullivan pointed out in a court filing that given the presence of multiple private lawyers, including SBF's father, when the cryptocurrency star relinquished control, it was impossible for the firm to coerce SBF into "raising the white flag."

Ultimately, Sullivan garnered support from the new CEO Ray, the official creditors' committee, and a previously skeptical trustee group, helping it to persevere in its bankruptcy task despite last-minute criticism from SBF and others.

Conclusion

Whether Sullivan's reputation suffers any lasting damage will take time to determine, and whether the law firm should leverage its expertise to identify companies built on lies remains an open question. Last week, CFTC Commissioner Christy Goldsmith Romero stated in a speech that "gatekeepers," including lawyers, should have seriously questioned the operational environment that ultimately led to FTX's collapse.

Such a role may contradict the firm's desire to establish connections with hot new companies. Former federal prosecutor and private sector lawyer Ankush Khardori said that large law firms are eager to bet on emerging companies, believing that these firms will grow into major clients.

"The whole thing makes these firms very susceptible to clients that will ultimately turn out to be frauds or scammers," he said, "Sullivan seems to have learned this lesson either too late or not at all, as long as they can continue to make money."