Report: Sullivan & Cromwell Didn’t Overlook Red Flags That Would Have Exposed FTX’s Misconduct

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Examiner Robert Cleary has exonerated Sullivan & Cromwell (S&C) from accusations of malpractices that aided the collapse of FTX.

FTX creditors sued the law firm, alleging that it deliberately ignored FTX’s fraudulent conducts and omissions, adding the exchange to misappropriate investor funds.

After probing into S&C’s practices and dealings with the bankrupt exchange, the Examiner concluded the firm didn’t ignore red flags that would have exposed FTX’s misconduct. 

Probe into S&C’s Dealings with FTX

In February, a group of investors sued giant law firm Sullivan & Cromwell for participating in the fraud scheme that caused FTX’s downfall. Given the law firm’s relationship with FTX and its former CEO, the lawsuit alleged that S&C aided the collapse by ignoring FTX’s financial misconduct. 

Part of the complaint read: “[…] 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 gain.”

The complaint also alleged that Sullivan & Cromwell offered services beyond the normal scope of a law firm. It claimed the S&C lawyers eagerly crafted misleading strategies that aided FTX’s misconduct. 

Meanwhile, S&C claimed its dealings with FTX before the exchange’s bankruptcy were limited. It also claimed to have reported concerns to law enforcement after hearing about the exchange’s issues.

According to reports, Judge John Dorsey appointed Robert Cleary, a former Unabomber prosecutor, to examine whether S&C deliberately aided FTX’s misconduct.

In a May report, Cleary recommended an investigation into S&C’s representation of Sam Bankman-Fried when he purchased some Robinhood shares. 

Sam Bankman-Fried purchased more than 7% of Robinhood (HOOD) shares worth $648 million in May 2022. The shares were under the management of Emergent Fidelity Technologies Ltd, a company Bankman-Fried controlled. S&C was the legal advisor for that investment.

Robert Cleary wanted to determine whether the investors’ claims that Sullivan & Cromwell helped to round-tip the Robinhood stock purchase were valid. 

In addition, Ryne Miller, FTX.US general council, emailed S&C partners in April 2022 with the subject “Sam trading question.” Miller questioned the law firm about a supposed acquisition of a significant stake in a publicly traded company. 

Sullivan & Cromwell Exonerated from FTX’s Collapse Blames

In Cleary’s witness interviews, Sullivan & Cromwell lawyers said they didn’t think it was unusual that Miller, an employee of the FTX Group, contacted them regarding Bankman-Fried’s investments. 

S&C lawyers told Miller that acquiring more than 5% of a company’s shares required filing a Form 13D. In response, Miller said Bankman-Fried did not mind his name in the 13D filing but that Alameda’s name shouldn’t be included.

The Examiner noted that S&C didn’t find Miller’s questions unusual since Bankman-Fried largely owned the FTX Group, and wealthy individuals like him often relied on their employees in that manner. 

Therefore, he concluded that Sullivan and Cromwell didn’t overlook red flags that would have exposed FTX’s misconduct. He also found that the law firm had no disqualifying conflict of interest when advising the former FTX CEO on his Robinhood shares acquisition.

Further, Cleary stated, “The S&C attorneys were not suspicious of Bankman-Fried’s reluctance to disclose Alameda because confidentiality is often of paramount importance to wealthy individual clients for completely legitimate reasons.”

Based on his investigations, the Examiner found the explanations credible and believes S&C didn’t ignore a red flag by not probing further.