Bebeto Matthews/AP Photo
FTX founder Sam Bankman-Fried leaves Manhattan federal court, June 15, 2023, in New York.
The money is on Sam Bankman-Fried going away to prison for a long time, now that a jury has convicted him of securities fraud, wire fraud, and money laundering in the FTX case. After one of the most closely followed trials in modern American history, people are already moving on. But wait! There’s still the Enron Question.
Jeff Skilling and Ken Lay didn’t create Enron’s elaborate scaffolding of fraud all by themselves. Who else helped SBF and his nerdy band of lieutenants build FTX before it crashed and burned?
When Enron blew up and went into bankruptcy, the judge made sure that question was answered, by empowering an independent examiner—someone with no ties to the business—to find out. That led to lawsuits against and recoveries from some of the banks, auditors, and law firms that helped Enron implement its fraud.
By contrast, the lawyers currently in charge of FTX convinced the bankruptcy judge that they could investigate any wrongdoing at FTX themselves. Which is interesting, since the law firm, Sullivan & Cromwell, was a key legal adviser to FTX for more than a year before the bankruptcy.
Their work began after FTX hired a Sullivan & Cromwell partner named Ryne Miller as general counsel of FTX U.S. in 2021. Miller hasn’t spoken publicly about what happened at the company. But unlike most FTX employees who fled or were fired, Miller stayed on at FTX for several months after the crash, according to his LinkedIn account.
The record is clear that Miller and Sullivan & Cromwell were key to initiating the bankruptcy, right down to the naming of John J. Ray, Enron’s post-bankruptcy CEO, to take over the same role at FTX. Plus, it was Sullivan & Cromwell’s work for federal prosecutors (which was billed to FTX’s customers and creditors) that led to the lightning speed of the case, which went from indictment to trial to the conviction of SBF in under a year.
The bankruptcy judge dismissed concerns about any conflict of interest when he allowed Sullivan & Cromwell to stay on as bankruptcy counsel to FTX. But conflict of interest is about the appearance of conflict as well as what’s proven. And frankly, Sullivan & Cromwell flunks that test.
SBF claims that Sullivan & Cromwell took control of the company by misleading him—and at the same time reporting him to authorities—all while he was still CEO of their client, FTX. He has also maintained that Sullivan & Cromwell’s lawyers pressured him into resigning last November, in part by promising he would get to name the new board chairman. As soon as he signed over control, however, Sullivan & Cromwell’s handpicked CEO shut out SBF, and immediately named Sullivan & Cromwell as the law firm to represent FTX in the bankruptcy.
The law firm denied these assertions to the bankruptcy court. And now that he’s been so soundly convicted, SBF’s claims seem so … beside the point. But regardless of SBF’s own guilt, the ethical and conflict questions should be investigated by someone who is truly independent, says Jonathan Lipson, a law professor at Temple University.
FTX’s bankruptcy highlights how much power the debtors and their lawyers have in controlling the facts and the evidence.
Lipson and a group of law professors say an appeals court should order an independent examiner to look at these issues. On Wednesday, the U.S. Third Circuit Court of Appeals will hear arguments on that question.
Another reason why the situation cries out for an independent eye, Lipson and others say, is that the law firm is running FTX’s bankruptcy with an unusual degree of secrecy. For starters, the Sullivan & Cromwell lawyers have convinced the judge to seal the names of FTX’s customers permanently and go so far as to declare them a trade secret. They’ve also sealed many documents in the case that are routinely disclosed, having to do with the sale of FTX assets, bonuses to key employees, and the hiring of professionals. The law firm has cited cybersecurity concerns and the need to protect confidential business information.
And there’s perhaps the most significant secret: Early on in the case, they quietly convinced the judge to give them sole discretion to legally shield from liability any people involved with FTX whom they chose to protect—and to seal those names too.
“The potentially significant conflicts of the Debtors’ professionals, combined with extraordinary secrecy, make it difficult to know who and what are being investigated, by whom, and to what end,” Lipson and the other law professors wrote to the Third Circuit in an amicus brief.
Sullivan & Cromwell did not respond to a series of questions from the Prospect, including whether they had any information about FTX customers engaging in possible criminal activity. But two days after we sent our questions, Bloomberg published a story addressing exactly that, saying that bankruptcy advisers forwarded customer trading information to the FBI. The story found these facts buried inside a 900-page billing record made public on the bankruptcy docket.
FTX’S BANKRUPTCY HIGHLIGHTS HOW MUCH POWER the debtors and their lawyers have in controlling the facts and the evidence. In the case of FTX, that power reached even beyond the bankruptcy court.
If you followed the case, you may have seen how SBF’s defense lawyers were stymied from mentioning the role of lawyers at FTX (except for one lawyer, Daniel Friedberg, who, amongst his other issues, had tried unsuccessfully to keep Sullivan & Cromwell from running the bankruptcy).
More typically, it went like this in the courtroom, as when SBF’s lawyers tried to raise the name of Ryne Miller, the former Sullivan & Cromwell partner who was general counsel of FTX U.S.:
SBF’s lawyer: I wanted to ask him [an FBI agent who was testifying] if he knows who Ryne Miller is.
Judge Lewis Kaplan: You can ask him who Johnny Podres was.
SBF’s lawyer: Yes, your Honor.
Judge Kaplan: He was a pitcher for the Brooklyn Dodgers.
SBF’s lawyer: Nothing further.
Sullivan & Cromwell convinced the bankruptcy judge not to appoint an outside examiner, arguing that it would cost too much. Some of FTX’s customers appreciated the irony, given the fact that the bankruptcy is costing them more than a million dollars a day in professional fees.
“I’m ignorant of how the bankruptcy process works,” Pat Rabbitte, who’s an FTX customer in Ireland, told me. “But this is a bankruptcy process I’d expect from somewhere like Zimbabwe, not the U.S.”
The law professors want to see an independent examiner review Sullivan & Cromwell’s work for FTX for conflicts, and look at the sealed documents to uncover what information could properly be made public. That, they say, would benefit both FTX’s customers and the public interest.
But an outsider could also take a look at a lot more:
- Explain how this “dumpster fire” of a company, as Ray called it, came so close to getting the green light to open up the crypto futures market—and perhaps other markets—to U.S. customer trading without a broker to clear the trades. Ryne Miller, who had been counsel for the chairman of the Commodity Futures Trading Commission, and Sullivan & Cromwell handled that work for FTX, a company without a board of directors, a chief risk officer, or basic governance practices. A Sullivan & Cromwell lawyer withdrew the CFTC application for FTX on the very same day that FTX filed for bankruptcy.
- Investigate and assess the full story of the relationship between FTX and the U.S. banking system. FTX, its infamous trading firm Alameda, and its crypto derivatives unit LedgerX used Signature Bank and Silvergate Capital for customer deposits, before those banks collapsed in the wake of FTX’s failure, with billions of dollars of loans from the Federal Home Loan banks on their books propping them up. Wall Street veteran Larry Thompson chaired the board of LedgerX at the same time that he was on the board of the Federal Home Loan Bank of New York, which Signature leaned on during the crypto downturn. Plus, Moonstone Bank, a tiny institution in rural Washington state with only three employees and owned by the chairman of a separate FTX banking partner, received an $11.5 million investment from Alameda and held millions of dollars in FTX deposits.
- Review details of FTX’s spectacularly rapid asset sales and settlements, to determine whether they’ve truly been in the best interest of FTX’s creditors. FTX’s bankruptcy team sold LedgerX, the FTX entity with three valuable regulatory licenses, to an investor for $50 million, after purchasing them for $298 million. The team also quickly sold FTX’s warrants to buy a crypto token called SUI for $96 million. Weeks later, the token made its trading debut at a value that would have exceeded a billion dollars for FTX.
When it all shakes out, given the emerging picture of FTX’s finances, could it be that FTX didn’t have to go into this bankruptcy with a multimillion-dollar price tag in the first place?
The answers to these questions, from an examiner who would cost less than the enormous sums being billed by bankruptcy lawyers and consultants, could even end up bringing money back to Rabbitte and other customers. And it would make FTX’s bankruptcy less of a black box, and more of what bankruptcy in America is supposed to be built upon: transparency.
