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FTX Creditors File a Fraud Involvement Lawsuit Against S&C Law Firm

FTX creditors accuse S&C of aiding fraud

The unraveling saga of FTX's bankruptcy has taken a dramatic turn with creditors filing a class-action lawsuit against Sullivan & Cromwell (S&C), the law firm overseeing the case. The court filing on February 16 alleges S&C “actively participated in the FTX Group’s multibillion-dollar fraud,” benefiting financially from the exchange's downfall. According to the complaint: 

“S&C knew of FTX US and FTX Trading Ltd.’s omissions, untruthful and fraudulent conduct, and misappropriation of Class Members’ funds. Despite this knowledge, S&C stood to gain financially from the FTX Group’s misconduct and so agreed, at least impliedly, to assist that unlawful conduct for its own gain.” 

This lawsuit seeks to hold Sullivan & Cromwell accountable for civil conspiracy, aiding and abetting fraud, and aiding and abetting fiduciary breaches, marking a new chapter in the FTX bankruptcy case.

The controversial relationship between FTX and S&C

Sullivan & Cromwell's relationship with FTX predates the crypto exchange's bankruptcy, casting a long shadow over the firm's current legal challenges. The law firm, established over a century ago and now embroiled in the FTX bankruptcy proceedings, had previously acted as outside counsel for FTX in significant transactions. These included FTX’s bids for the assets of Voyager Digital Holdings and the acquisition of LedgerX, with S&C receiving substantial payments for its services. In the wake of FTX's collapse, the firm's fees for the bankruptcy case are estimated to reach into the hundreds of millions of dollars.

The ties between FTX and S&C were notably strengthened by Ryne Miller, a former S&C partner who transitioned to FTX Group as general counsel in August 2021. Miller's move facilitated at least 20 cases being directed from FTX to his former law firm. 

Daniel Friedberg, FTX's former chief regulatory officer, highlighted this relationship in a court filing, stating: 

“Mr. Miller informed me that it was very important for him personally to channel a lot of business to S&C as he wanted to return there as a partner after his stint at the Debtors.” 

Additionally, the close connection between the entities was underscored by former FTX CEO Sam Bankman-Fried's frequent presence in S&C’s New York offices, signifying a relationship that went beyond mere professional consultancy.

Legal and financial repercussions for S&C

The allegations of aiding and abetting FTX's fraudulent activities have prompted scrutiny from various quarters, including a bipartisan group of United States senators. In January 2023, these senators expressed concerns to the judge overseeing the FTX bankruptcy case, advocating for the appointment of an independent examiner. They argued that S&C's close ties to FTX might compromise the firm's ability to "uncover the information needed to ensure confidence in any investigation or findings."

Sullivan & Cromwell defense against these accusations has been firm. A spokesperson for the law firm denied any wrongdoing, stating that S&C had 

"never served as primary outside counsel to any FTX entity" 

and maintained a 

"limited and largely transactional relationship with FTX and certain affiliates prior to the bankruptcy." 

Despite this defense, the ongoing legal battle and public scrutiny could have significant financial implications for the firm. Not only are S&C's fees for the bankruptcy case under the microscope, but the firm also faces the risk of reputational damage that could affect its business relations and future client trust.