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Judge Approves FTX Probe Into Law Firm Sullivan and Cromwell

Judge Approves FTX Probe Into Law Firm Sullivan and Cromwell

Julia Smith

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| 2 min read

Sullivan and Cromwell, FTX probe

Unabomber prosecutor Robert J. Cleary has been given the green light by a U.S. bankruptcy judge to probe law firm Sullivan and Cromwell’s potential conflicts of interests in relation to FTX, according to a Wednesday court filing.

What Will Cleary Find in FTX Probe?

Cleary’s appointment by Judge John Dorsey marks a key shift in the examination of the FTX’s collapse, formally reversing his rejection of an independent examiner in February 2023. Sullivan and Cromwell spearheaded the doomed crypto exchange through its Chapter 11 bankruptcy proceedings and has since charged over $170 million for its services.

Last month, a number of FTX investors filed a class action lawsuit against the law firm, noting Sullivan and Cromwell’s “conduct and participation” in “racketeering activity” with Sam Bankman-Fried’s exchange. 

Investors claimed that through the firm’s advisement to FTX through 2021 and 2022, Sullivan and Cromwell “placed itself in a unique position to gain deep insight into the FTX entities’ convoluted organizational structure, abject lack of internal controls, and dubious business practice.”

Additionally, they alleged that the law firm “vouched for the solvency, safety, and security of the FTX Group up until its very collapse,” misleading customers and investors of the exchange.

“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,” the filing continued.

FTX’s Collapse Prompts Conflict of Interest Concerns

News of Cleary’s approval comes just two months after a federal appeals court mandated the reversal of Dorsey’s February 2023 decision, citing added security to the crypto sector as a whole.

“The collapse of FTX caused catastrophic losses for its worldwide investors but also raised implications for the evolving and volatile cryptocurrency industry,” said Judge Luis Felipe Restrepo. “For example, an investigation into FTX Group’s use of its own cryptocurrency tokens, FTTs, to inflate the value of FTX and Alameda Research could bring this practice under further scrutiny, thereby alerting potential investors to undisclosed credit risks in other cryptocurrency companies.”

Critics of FTX’s collapse have long called for such an examination, with Senators John Hickenlooper (D-CO), Thom Tillis (R-NC), Cynthia Lummis (R-WY), and Elizabeth Warren (D-MA) penning a letter to Dorsey in January 2023 for an “objective investigation.”

“As legal counsel is often central to major financial scandals, given their role in drafting financial agreements, risk management compliance practices, and corporate controls, it is perfectly reasonable to have concerns about the impartiality and manner that Sullivan & Cromwell will approach any investigation of FTX with,” the senators wrote.

Going Forward

Meanwhile, current FTX CEO John J. Ray III has pushed back against the appointment of an independent examiner, claiming the crypto company is now fully independent from the convicted fraudsters.

Cleary is set to return a report detailing his investigative findings on FTX’s collapse within sixty days. Bankman-Fried is currently scheduled for sentencing on March 28th in Manhattan federal court.

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