A bankruptcy court judge in Delaware has given New York law firm Sullivan & Cromwell the green light to continue representing FTX during its bankruptcy proceedings.
The decision, issued on Friday morning by Judge John T. Dorsey, comes despite recent controversy about the white-shoe law firm having potential conflicts of interest that critics say should disqualify Sullivan & Cromwell from acting as debtors’ counsel.
Late Thursday evening, former FTX attorney Daniel Friedberg – who served as the now-defunct exchange’s chief regulatory officer – filed an unorthodox declaration that contained numerous bombshell allegations of wrongdoing in Sullivan & Cromwell’s previous work with FTX.
In his declaration, Friedberg alleged that Ryne Miller – FTX US’ general counsel and a former partner at Sullivan & Cromwell – funneled millions of dollars in legal work back to his ex-colleagues. The relationship between Miller and Sullivan & Cromwell was not initially disclosed by the law firm, leading the U.S. Trustee’s Office to file an objection to the appointment of Sullivan & Cromwell as debtors’ counsel on Jan. 13.
Friedberg and the U.S. Trustee’s Office are not the only ones that question Sullivan & Cromwell putting its finger in the FTX pie.
On Jan. 10, a bipartisan group of U.S. senators sent a letter to Judge Dorsey urging him to appoint an independent examiner and to question Sullivan & Cromwell’s involvement. The senators pointed out that there were “significant questions about the firm’s involvement in operations of FTX” and “put bluntly, the firm is simply not in a position to uncover the information needed to ensure confidence in any investigation or findings.”
Disgraced former CEO Sam Bankman-Fried has also questioned Sullivan & Cromwell’s role in the bankruptcy process, making dubious claims in a recent Substack post that FTX US was solvent at the time the company filed for bankruptcy protection. He previously claimed that Sullivan & Cromwell wrongfully pressured him to allow FTX to file for bankruptcy.
Judge Dorsey, however, was not moved by the mounting concerns over Sullivan & Cromwell’s appointment as debtor’s counsel. He previously dismissed the senators’ letter as “inappropriate” and, on Friday, described Friedberg’s declaration as “full of hearsay, innuendo, speculation and rumors.”
After a brief recess to allow him to consider the arguments, Judge Dorsey handed down his decision to approve Sullivan & Cromwell’s appointment as debtors’ counsel.
“There’s no evidence of any actual conflict here,” Dorsey said. “Any potential conflicts are ameliorated by the fact that there’s conflicts counseling in place – that’s something that happens in every large bankruptcy case.”
“This is what we call a super-mega case,” Dorsey added. “Even in a mega case, or a large case, it would be difficult to find debtors’ counsel that didn’t have other clients who might be clients of the Debtors’ counsel.”
‘Fighting with a ghost’
Of all the criticism that has been lobbed at Sullivan & Cromwell, which is earning $2,000 an hour for its work on the case, accusations by Bankman-Fried seemed to most rankle the firm’s lead attorney on the case, New York-based partner James Bromley.
“One of the things that the debtors have been facing in these [FTX bankruptcy] cases is assault by Twitter,” Bromley said. “It’s very difficult, Your Honor, to cross-examine a tweet – particularly tweets that are being issued by individuals who are under criminal indictment and whose travel is restricted.”
“Those who have things to say should come to court and say those things,” Bromley added.
Bromley expressed frustration with Bankman-Fried’s numerous claims on social media, adding that dealing with him was like “fighting a ghost” and insinuating that Bankman-Fried’s machinations were to blame for the controversy around Sullivan & Cromwell’s appointment.
“Mr. Bankman-Fried is behind all of this,” Bromley said. “And wherever we move this … in my mind, there is absolute certainty that he’s going to try to do something to get in the way. He’s lashing out.”
Friedberg’s ‘checkered past’
“Mr. Friedberg – I have to say he’s got a checkered past,” Bromley told the court. “It takes a lot of guts for him to put something in writing that says ‘I was the chief compliance officer at FTX.’”
Bromley described Friedberg’s declaration as nothing more than an “incendiary device” thrown into the bankruptcy process.
“If you’re part of the inner circle at FTX – and that would include Mr. Friedberg – then you have concern about the exercise that’s going on … [T[he individuals who were up and running and making the decisions that have brought this company to its knees are rightly concerned that the information that is being provided to authorities could lead back to their doorstep,” Bromley said.
“So what we have here, Your Honor, is a gentleman who ran this company into the ground – Mr. Bankman-Fried – sitting in his parents’ home in Palo Alto, California, with an ankle bracelet on after being extradited from the Bahamas and charged with multiple crimes … So if you’re Mr. Bankman-Fried or, frankly, Mr. Friedberg, there’s a concern about what’s going on and what could happen to them,” Bromley continued.
“They can’t throw stones at the U.S. Attorney’s Office, but they can throw stones at debtors’ counsel that’s providing information to the prosecutors and the regulators,” Bromley added. “And that’s exactly what’s happening.”
UPDATE (Jan. 20, 18:09 UTC): Added additional information and context throughout.
UPDATE (Jan. 20, 18:31 UTC): Added section on Friedberg.
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