FTX fights objections over law firm as judge weighs approval

Illustration shows FTX logo and broken glass
An FTX logo is seen through broken glass in this illustration taken, December 13, 2022 REUTERS/Dado Ruvic/Illustration

(Reuters) - The U.S. Justice Department's bankruptcy watchdog is opposing FTX's bid for a bankruptcy judge's approval to hire law firm Sullivan & Cromwell, which on Tuesday defended its disclosures about its prior work for the failed cryptocurrency exchange.

U.S. Trustee Andrew Vara told the judge in a filing late Friday that Sullivan & Cromwell’s disclosures about its past work for FTX were “wholly insufficient” to determine if the firm has conflicts that could affect its representation.

Vara faulted Sullivan & Cromwell for not disclosing that FTX’s U.S. general counsel, Ryne Miller, is a former partner at the firm. He also objected to the firm seeking a role in investigating the demise of FTX, noting that such a probe “would necessarily focus on those with connections to S&C — and possibly on S&C itself."

FTX, in a response on Tuesday authored by Sullivan & Cromwell lawyers, defended the firm's recent work for the exchange, saying it had been "directly responsible" for securing customer assets and sharing valuable information with U.S. prosecutors and regulators.

FTX said it had provided additional disclosures to the U.S. Trustee about the firm's past work, and argued that the firm is not conflicted just because it advised the exchange prior to the bankruptcy. Sullivan & Cromwell partner Andrew Dietderich said in a declaration that the firm had counseled FTX on 20 separate matters prior to the bankruptcy.

New York-based Sullivan & Cromwell is seeking the court's approval to be appointed primary bankruptcy counsel to FTX, a lucrative role that would likely allow the firm to reap hundreds of millions of dollars in fees, legal experts have said.

Federal bankruptcy law says law firms representing debtors must not have a direct interest in the proceedings. A federal bankruptcy judge is scheduled to hold a hearing on Friday to determine if the firm’s appointment should move forward.

The U.S. Trustee has also pressed for an independent examiner to investigate FTX’s unraveling.

A Sullivan & Cromwell spokesperson has said the firm had a “limited and largely transactional” relationship with FTX prior to the bankruptcy and never served as primary outside counsel to any FTX entity. The firm did not immediately comment on Tuesday.

The firm, which represents many large financial institutions, argued in its counsel application that it meets FTX's need for sophisticated counsel across a range of practice areas.

Sullivan & Cromwell has said in court papers that it collected more than $8.5 million from FTX from July 2021 until the company filed for bankruptcy in November 2022, advising on “acquisition transactions and specific regulatory inquiries.”

FTX co-founder Sam Bankman-Fried, facing indictment on numerous fraud charges, disputed the firm’s depiction of its work with FTX in a blog post last week, claiming Sullivan & Cromwell was a primary outside law firm for both FTX’s U.S. and international businesses.

Bankman-Fried has repeatedly assailed Sullivan & Cromwell since FTX’s implosion, claiming he was strong-armed by lawyers at the firm into filing for bankruptcy and surrendering control of the company.

Dietderich called those allegations "false" in Tuesday's declaration. He said Bankman-Fried had consulted with other associates, including his father Stanford University law professor Joseph Bankman, on the decision to file for bankruptcy.

Some FTX creditors and a bipartisan group of U.S. senators have separately raised concerns to the Delaware bankruptcy judge about the law firm’s ability to conduct an impartial investigation. Last week four senators said in a letter that Sullivan & Cromwell "may well bear a measure of responsibility" for the implosion of FTX.

U.S. Bankruptcy Judge John Dorsey criticized the senators for filing the letter outside the court proceedings during a Jan. 11 hearing and said outside pressure "will have no impact on my decisions whatsoever."

(NOTE: This story has been updated with FTX's response to the trustee.)

Additional reporting by Dietrich Knauth.

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