In an interesting development, FTX creditors have launched a class action lawsuit against Sullivan and Cromwell (S&C), the law firm that is currently responsible for handling the bankruptcy proceedings of the defunct exchange. In a petition submitted on February 16 to the US District Court of the Southern District of Florida, S&C is accused of aiding and abetting the crypto exchange’s alleged fraud, having served as close legal counsel.
The FTX And S&C Ties
According to the details from the lawsuit, the relationship between the defunct exchange and S&C began in August 2021 when FTX appointed Ryne Miller, a former employee at the law firm, as its general counsel. It was stated that Miller, who had also worked as a lawyer with the US Commodity Futures Trading Commission (CFTC) was specifically employed to aid the exchange in sorting out its licensing issues with the Commission as well as other regulatory hurdles.
During his time as general counsel, Miller helped build and strengthen the relationship between the crypto trading platform and S&C, as it is believed that he had ulterior plans of returning as a partner to the law firm. Through Miller, S&C served as outside counsel to FTX, meditating on a minimum of 20 different matters for the exchange – three of which attracted fee payments of over $1 million.
In particular, S&C provided counsel to FTX on regulatory issues as well as M&A and third-party bankruptcy matters. Notably, the law firm advised the exchange on the acquisition of the futures exchange platform LedgerX, which was allegedly done with the customer’s deposits. S&C also served as representatives of FTX in the proposed $1.42 billion purchase of Voyager Digital crypto assets.
S&C Potential Troubles
Based on the nature of dealings between both parties, The FTX creditors’ petition states that S&C was well-informed on the dubious activities of the crypto exchange and its subsidiaries. For example, the LegderX takeover is believed to have allowed S&C to learn of a “backdoor” that permitted FTX to direct customer funds to its trading wing – Alameda research. In addition, the law firm is also said to have gained knowledge of a code base, which allowed Alameda to avoid auto-liquidation even in cases of a negative balance.
However, despite this knowledge, S&C remained as FTX representatives in that deal and future transactions, vouching for the exchange’s “corporate governance, good standing, compliance with laws, and sources of funds for the acquisitions.” Based on these grounds, the law firm now faces charges of civil conspiracy, aiding and abetting fraud, and aiding and abetting fiduciary fraud.
The plaintiffs have demanded a jury trial and are seeking compensation for damages as a result of the law firm’s alleged complicity in FTX’s fraud. In addition, this lawsuit now draws more scrutiny to S&C’s position as the current handler of FTX’s bankruptcy proceedings, a role that requires a set level of independence and impartiality.
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