FTX’s Legal Battles Intensify: Sullivan & Cromwell’s Role Under Scrutiny Amid Conflict of Interest Claims

The FTX saga continues to unravel, and this time, the spotlight is on the legal team steering the ship through the bankruptcy proceedings. Sullivan & Cromwell, the law firm chosen as principal counsel for FTX, is facing a barrage of protests and serious allegations of conflict of interest. Are they the right choice to navigate this complex financial disaster, or are their past ties to FTX clouding their judgment? Let’s dive into the escalating controversy.

Why is Sullivan & Cromwell’s Appointment as FTX Counsel Causing a Stir?

Several parties are raising red flags about Sullivan & Cromwell (S&C) leading FTX’s bankruptcy case. The core concern? Potential conflicts of interest stemming from the firm’s prior relationship with the now-bankrupt crypto exchange. Critics argue that S&C’s past work for FTX and its connections to other involved parties might compromise its ability to act impartially and in the best interests of all creditors.

Despite the rising pressure, FTX’s new CEO, John J. Ray III, is standing firm in his decision to retain Sullivan & Cromwell. Ray, who took the helm on November 11th, describes the situation he inherited as a “dumpster fire.” He argues that S&C’s expertise is crucial for untangling the mess and recovering assets for creditors. In a recent court motion on January 17th, Ray emphasized S&C’s instrumental role in his efforts to seize control and begin the recovery process.

Ray’s stance is clear:

“The advisors are not the villains in these cases. The villains are being pursued by the appropriate criminal authorities largely as a result of the information and support they are receiving at my direction from the Debtors’ advisors.”

He believes that S&C is a valuable asset in pursuing those responsible for FTX’s downfall, rather than a liability.

What are the Specific Objections?

However, not everyone is convinced. U.S. Trustee Andrew R. Vara filed a formal objection on January 14th, outlining two primary areas of concern:

• Insufficient Disclosure: Vara argues that Sullivan & Cromwell failed to adequately reveal the extent of their prior connections and work for FTX. Transparency is paramount in bankruptcy cases, and the lack of full disclosure raises questions about potential hidden biases.
• Prior Relationship & “Insider” Concerns: Publicly available information reveals that a former partner from Sullivan & Cromwell transitioned to become counsel for FTX a mere 14 months before the bankruptcy filing. This close relationship raises questions about S&C’s independence and whether they can truly be considered a disinterested party in this case.

The Apollo Global and Jay Clayton Connection: A Deeper Dive into Conflict Allegations

Adding another layer of complexity, lawyer and prominent Twitter commentator MetaLawMan (James A. Murphy) has highlighted a potentially significant conflict involving Apollo Global, a private equity giant. Murphy points out that:

• Apollo’s Creditor Claim Acquisitions: Apollo Global has reportedly been buying up creditor claims from FTX customers at significantly discounted rates. This is a common practice in bankruptcy proceedings, but the potential conflict arises from the next point.
• Jay Clayton’s Dual Role: Jay Clayton, the chairman of Apollo Global, also works for – you guessed it – Sullivan & Cromwell. This connection raises serious concerns because S&C, as FTX’s counsel, has access to sensitive financial information that could potentially benefit Apollo Global’s investment strategies related to FTX creditor claims.

This alleged link between Sullivan & Cromwell, Apollo Global, and insider information is fueling further skepticism about the law firm’s suitability to represent FTX in this bankruptcy.

The Independent Examiner Debate: Duplication or Necessity?

The U.S. Trustee has also raised concerns about the potential duplication of efforts and costs. They argue that retaining Sullivan & Cromwell in its current capacity might “usurp” the role of an independent examiner.

What’s an Independent Examiner? In bankruptcy cases, especially those involving large debts and potential fraud, an independent examiner can be appointed to conduct a thorough investigation into the debtor’s affairs. This examiner operates independently of the existing legal counsel and other parties involved.

The Trustee emphasizes that appointing an independent examiner is crucial, especially in a case like FTX, where debts exceed $5 million. They argue that having both S&C and an examiner performing potentially overlapping tasks would be inefficient and a drain on the FTX estate’s already limited resources.

Political Pressure and Judicial Scrutiny

The call for an independent examiner is gaining momentum. A bipartisan group of four U.S. representatives wrote to Delaware bankruptcy judge John Dorsey on January 10th, urging him to approve the appointment of an examiner. They expressed their “surprise” that Sullivan & Cromwell could be considered a “disinterested” party given the circumstances.

Judge Dorsey, however, dismissed the representatives’ letter as “improper ex parte communication,” indicating he wouldn’t consider it in his decision-making process regarding the examiner or S&C’s retention. He did, however, acknowledge that he would consider an objection from an FTX creditor, also filed on January 10th, which echoes the conflict of interest concerns related to Sullivan & Cromwell’s past work for FTX.

The Road Ahead: What’s Next for FTX and its Legal Representation?

The future of Sullivan & Cromwell’s role as FTX’s principal counsel hangs in the balance. Judge Dorsey is now tasked with weighing the arguments for and against their retention. Key factors he will likely consider include:

• The Creditor’s Objection: The formal objection from an FTX creditor directly challenges S&C’s disinterestedness due to prior FTX work.
• U.S. Trustee’s Concerns: The Trustee’s arguments about insufficient disclosure and potential duplication of services carry significant weight.
• John J. Ray III’s Defense: Ray’s strong endorsement of S&C and his emphasis on their current value in asset recovery cannot be ignored.
• The Independent Examiner Application: The decision on whether to appoint an examiner will also influence the scope and necessity of S&C’s role.

The coming weeks will be critical in determining the legal path forward for FTX. The decision on Sullivan & Cromwell’s role will not only impact the bankruptcy proceedings but also set a precedent for how potential conflicts of interest are handled in high-stakes crypto-related financial collapses. Will Judge Dorsey side with the new CEO’s confidence in S&C, or will the mounting pressure from creditors and regulators lead to a change in legal strategy? The crypto world, and especially FTX creditors, are watching closely.