When the chips fell for the cryptocurrency exchange FTX, few could predict the whirlwind of controversy and alleged conflicts that would ensue, especially concerning the involvement of the law firm Sullivan & Cromwell (S&C). A bombshell claim by two law professors has thrown a spotlight on the firm, accusing it of prioritizing its own gains over those of FTX and its stakeholders. As the saga unfolds, the intricate web of decisions leading up to and following the bankruptcy of FTX in November 2022 raises more questions than answers.
A Controversial Partnership Unveiled
Jonathan Lipson from Temple University and David Skeel of the University of Pennsylvania, in a recently published paper, delve into the murky waters surrounding S&C’s engagement with FTX. The crux of their argument? S&C’s alleged conflicts of interest, which they say “permeated” every crevice of FTX’s bankruptcy filing and case proceedings. The professors scrutinize the 20 merger and acquisition (M&A) and regulatory assignments undertaken by S&C for FTX, for which the law firm pocketed just shy of $10 million. This financial relationship, according to the academics, placed S&C in a privileged position, potentially aware of or at least should have been aware of, FTX’s mishandling of customer assets under the direction of its founder, Sam Bankman-Fried.
As Bankman-Fried faces sentencing after being found guilty of embezzling FTX customer funds, the focus shifts to the broader implications of FTX’s downfall. Robert Cleary’s recent appointment as an independent examiner in the bankruptcy case promises a deep dive into the events leading to the collapse, including scrutinizing the advisory roles played.
Despite S&C’s defense, stating the paper misconstrues facts and leans on unfounded allegations, the controversy over its role is hard to dismiss. S&C, representing FTX’s estate, navigated the company through its tumultuous final days and bankruptcy filing. The appointment of John Ray as FTX’s new chief executive by S&C, among other decisions, has been a particular point of contention. Critics argue these actions, along with S&C’s hefty $184 million earnings from FTX between November 2022 and January 2024, suggest a conflict of interest.
Ethical Quandaries and Stakeholder Fallout
The ethical responsibilities of S&C come under fire in the professors’ analysis. They lambaste the law firm for what they perceive as breaches of confidentiality, candour, and loyalty. Specifically, they accuse S&C of undermining Bankman-Fried by facilitating his ousting in favor of Ray. The outcome of such maneuvers, they argue, has been detrimental to FTX’s recovery prospects, benefiting S&C at the expense of stakeholders.
Yet, the complexity of the FTX saga defies simple explanations. Those close to S&C and FTX highlight the bankruptcy court’s role in approving company actions, suggesting a level of oversight and consent that complicates accusations of unilateral wrongdoing by S&C. Furthermore, they point out the potential for account holders to recoup their losses, offering a glimmer of hope amidst the turmoil.
The genesis of Lipson and Skeel’s collaboration on the article traces back to a shared skepticism of Bankman-Fried’s narrative and a concerted effort to piece together the puzzle of FTX’s collapse. Their work, slated for publication in the Stanford Law Review, emphasizes the nuanced duties of legal advisors in bankruptcy scenarios. Notably, their investigation proceeded without direct contact with S&C or FTX, a methodological choice that has not gone without critique.
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