FTX Creditors File Lawsuit Against Sullivan and Cromwell
In a significant development, FTX creditors have initiated a class action lawsuit against Sullivan and Cromwell (S&C), the law firm responsible for handling the bankruptcy proceedings of the defunct exchange. The petition, submitted to the US District Court of the Southern District of Florida, accuses S&C of aiding and abetting the alleged fraud committed by the crypto exchange.
The Relationship Between FTX and S&C
The lawsuit reveals that FTX appointed Ryne Miller, a former employee at S&C, as its general counsel in August 2021. Miller, who had prior experience as a lawyer with the US Commodity Futures Trading Commission (CFTC), was specifically hired to assist FTX in resolving licensing and regulatory issues.
During his tenure as general counsel, Miller worked towards strengthening the relationship between FTX and S&C. It is alleged that Miller had intentions of returning to S&C as a partner. As outside counsel to FTX, S&C provided advice on regulatory matters, mergers and acquisitions, and third-party bankruptcy cases. They advised FTX on the acquisition of LedgerX, which reportedly involved customer deposits, and represented FTX in the proposed purchase of Voyager Digital crypto assets.
Potential Troubles for S&C
The creditors’ petition suggests that S&C was aware of the suspicious activities of FTX and its subsidiaries due to their dealings. For instance, through the LedgerX takeover, S&C is said to have discovered a “backdoor” allowing FTX to direct customer funds to Alameda Research, its trading wing. Additionally, they allegedly gained knowledge of a code base that enabled Alameda to avoid auto-liquidation even in cases of a negative balance.
Despite this knowledge, S&C continued to represent FTX in various transactions, vouching for the exchange’s compliance with laws and sources of funds. As a result, the law firm is facing charges of civil conspiracy, aiding and abetting fraud, and aiding and abetting fiduciary fraud.
Compensation and Implications
The plaintiffs are seeking compensation for damages caused by S&C’s alleged involvement in FTX’s fraud and have requested a jury trial. This lawsuit also raises concerns about S&C’s role as the current handler of FTX’s bankruptcy proceedings, as it requires independence and impartiality.
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