On Wednesday, a U.S. bankruptcy judge authorized Robert J. Cleary, known for his role in prosecuting the Unabomber case, to investigate potential conflicts of interest involving law firm Sullivan and Cromwell concerning FTX, as per a court filing.
What findings might Cleary uncover during the FTX investigation?
Judge John Dorsey’s appointment of Cleary signifies a significant turn in the investigation into FTX’s collapse, overturning his previous denial of an independent examiner in February 2023. Spearheading the defunct crypto exchange’s Chapter 11 bankruptcy proceedings, Sullivan and Cromwell has billed over $170 million for its services.
Do you have Unabomber prosecutor probing Sullivan & Cromwell on your 2024 FTX bingo card? pic.twitter.com/Da6ADWnvTp
— Nicholas Hall (@nicholashall) March 22, 2024
In the previous month, several FTX investors initiated a class action lawsuit against the law firm, alleging Sullivan and Cromwell’s involvement in “racketeering activity” with Sam Bankman-Fried’s exchange.
Investors asserted that during Sullivan and Cromwell’s advisory role with FTX throughout 2021 and 2022, the firm gained extensive insight into the intricate organizational structure, inadequate internal controls, and questionable business practices of the FTX entities.
Furthermore, they claimed that the law firm endorsed the financial stability, safety, and reliability of the FTX Group until its eventual collapse, thereby misleading both customers and investors of the exchange.
“Despite being aware of these issues, S&C was positioned to benefit financially from the misconduct of the FTX Group and therefore, whether explicitly or implicitly, agreed to aid in such unlawful activities for its own advantage,” the filing elaborated.
The collapse of FTX raises concerns regarding conflicts of interest.
Cleary’s approval follows a federal appeals court’s ruling, which overturned Dorsey’s decision from February 2023, aiming to enhance security within the crypto sector. Judge Luis Felipe Restrepo highlighted the significant losses suffered by global investors due to FTX’s collapse and emphasized the broader implications for the cryptocurrency industry. He pointed out the need to investigate FTX Group’s utilization of its cryptocurrency tokens, FTTs, to artificially inflate the value of FTX and Alameda Research. Such scrutiny could potentially expose undisclosed credit risks in other cryptocurrency firms, serving as a cautionary measure for prospective investors.
Professors at Penn published a paper on Sullivan and Cromwell's lies to the CFTC pic.twitter.com/Lp8qdgT4mL
— Sunil (FTX Creditor Champion) (@sunil_trades) March 21, 2024
Critics have persistently advocated for an investigation into FTX’s collapse, with Senators John Hickenlooper (D-CO), Thom Tillis (R-NC), Cynthia Lummis (R-WY), and Elizabeth Warren (D-MA) addressing a letter to Dorsey in January 2023, urging for an “objective investigation.”
The senators expressed concerns about the potential bias and approach Sullivan & Cromwell might take in investigating FTX, given the significant role of legal counsel in major financial scandals. They highlighted legal counsels’ involvement in drafting financial agreements, ensuring compliance with risk management practices, and overseeing corporate controls, underscoring the need for impartiality in the investigation process.
Moving forward
Amidst these developments, John J. Ray III, the current CEO of FTX, has expressed opposition to the appointment of an independent examiner, asserting that the cryptocurrency company has distanced itself entirely from the convicted individuals involved in fraud.
In the coming days, Robert J. Cleary is tasked with delivering a comprehensive report outlining his investigative discoveries regarding the collapse of FTX. This report is expected to be completed within sixty days. Meanwhile, Sam Bankman-Fried, the founder of FTX, is awaiting sentencing, which is scheduled for March 28th in the federal court of Manhattan.
