The decision to retain Sullivan & Cromwell as the main counsel for the futures exchange (FTX) has been heavily criticized by various parties, as they noted the companies’ inadequate disclosures and conflict of interests as their reasons.
FTX CEO refuses removal of his law firm
The request to change the primary counsel handling FTX’s bankruptcy case has been rejected by the CEO of the cryptocurrency exchange, John J. Ray III.
On January 17, John J. Ray III, the new FTX CEO who had been appointed on November 11th, submitted a court motion claiming that Sullivan & Cromwell had played a significant role in helping him take charge of the mismanaged company that had been assigned to him.
Arguing that keeping their services on retainer would be in the interest of the creditors of the futures exchange (FTX), Ray said:
“The advisors are not the villains in these cases.” “The villains are being pursued by the appropriate criminal authorities largely as a result of the information and support they are receiving at my direction from the debtors’ advisors.”
A Twitter account with the handle MetaLawMan, identified as James A. Murphy, a lawyer, claimed that Sullivan & Cromwell earlier work for FTX was not its only conflicting interest in the matter. In his tweet, he said:
At the same time that Sullivan & Cromwell lawyers have had unrestricted access to all internal data about the value of FTX's assets and liabilities…
Apollo Global has (reportedly) been quietly offering to buy up creditor claims from FTX customers for pennies on the dollar.
— MetaLawMan (@MetaLawMan) January 13, 2023
He stated that while Sullivan & Cromwell lawyers had unlimited access to all the FTX data, the FTX customers’ creditor claims were being secretly purchased by private equity company Apollo Global for a small portion of their actual value.
“So, you might ask, where’s the conflict? Guess who the Chairman of the Board of Apollo Global is? None other than Sullivan & Cromwell lawyer–Jay Clayton (former SEC Chairman)…”
Murphy points out that Sullivan & Cromwell, a company that has access to FTX’s confidential financial data, also employs Jay Clayton, chairman of Apollo.
Also on January 14, U.S. Trustee Andrew R. Vara noted two distinct problems as he submitted an objection against the hiring of the legal team.
According to the filed objection, Sullivan & Cromwell did not adequately disclose its earlier works and relationships with FTX. He noted a former partner of the legal firm, according to information that was made publicly available, joined FTX as counsel 14 months before the bankruptcy filing, he added.
Also, according to information that was made publicly available, he noted the fact that a former partner of the legal firm joined FTX as counsel 14 months before the company filed for bankruptcy.
The role of an independent examiner in FTX bankruptcy case
On December 1, the trustee had originally requested the services of an independent examiner in reference to a section of the bankruptcy statute that requires the appointment of an examiner when specific debts surpass $5 million.
Also, the U.S. Trustee thought that the recent application to keep Sullivan & Cromwell was defective because the firm would duplicate its services at the expense of the Futures exchange (FTX) estate and overthrow the work of an independent examiner.
Four U.S. representatives, representing opposing political parties, wrote to John Dorsey, the Delaware bankruptcy judge, on January 10 to ask him to grant the request to appoint an independent examiner and express their surprise that the legal firm might be considered a “disinterested” party.
Nevertheless, Dorsey referred to the letter as “inappropriate ex parte communication” and declared that he would not take it into consideration when determining whether to appoint an impartial examiner or authorize the retention of Sullivan & Cromwell.
An FTX creditor had claimed that Sullivan & Cromwell prior work for FTX creates a conflict of interest. However, in determining whether to retain Sullivan & Cromwell, Dorsey will take into account the objection made by the creditor on January 10.