Sam Bankman-Fried, BlockFi and Sullivan & Cromwell
On December 21, Big Law firm Sullivan & Cromwell filed a conflict disclosure with the U.S. Bankruptcy Court in Delaware, where it was hoping to be officially appointed as lead counsel for the bankruptcy estate of Sam Bankman-Fried’s collapsed crypto house of cards – FTX, Alameda Research and its more than 100 opaque affiliates. Judge John Dorsey signed the order making Sullivan & Cromwell lead counsel on January 20, despite a mind-numbing list of conflicts of interests, including extensive past legal work for the FTX group and personal legal work for its now indicted kingpin, Sam Bankman-Fried. The disclosure showed that in addition to FTX and Alameda Research, Sullivan & Cromwell had 10 other current crypto clients, including four major crypto competitors to FTX — BlockFi, Coinbase, Gemini, and Kraken.
Damian Williams, the U.S. Attorney for the Southern District of New York, whose office indicted Bankman-Fried on eight criminal counts for looting billions of dollars from customer accounts, called FTX “one of the biggest financial frauds in American history.” Those four crypto competitors that Sullivan & Cromwell named as also being their clients, haven’t fared too well either.
BlockFi is in bankruptcy proceedings in the U.S. Bankruptcy Court for the District of New Jersey with over $1 billion exposure in loans and locked up assets at Bankman-Fried’s related companies. Coinbase is a publicly-traded crypto exchange in the U.S.; its shareholders lost 86 percent of their money if they owned the stock throughout last year. Gemini is a crypto exchange created by the Winklevoss twins, Cameron and Tyler. Its customers have been locked out of their interest-bearing “Earn” accounts to the tune of $900 million since November 16 of last year. Kraken is also a crypto exchange; last Thursday the Securities and Exchange Commission charged it with the “illegal unregistered offer and sale of securities involving the staking of crypto assets.” Kraken agreed to pay $30 million in penalties and disgorgement.
While this litany of crypto disasters does not paint a pretty picture of what is happening in general with Sullivan & Cromwell’s crypto clients, BlockFi is in a league of its own in terms of a viper’s nest of conflicts inside Sullivan & Cromwell and internecine intrigue.
Under Bankruptcy Code Section 327(a), attorneys hired by the bankruptcy estate cannot hold or represent an interest adverse to the estate and must be “disinterested persons.” The December 21 disclosure filed with the FTX bankruptcy court included a declaration from Sullivan & Cromwell partner, Andrew Dietderich, who told the court the following:
“Based solely on the conflicts procedures described herein, (i) S&C is not aware of any conflict between its representation of the Debtors and its representations of its Current Clients or Former Clients that would cause S&C not to be a ‘disinterested person,’ (ii) S&C does not represent any person or entity having an interest adverse to the Debtors in connection with these chapter 11 cases….”
On the date of that declaration, December 21, Sullivan & Cromwell was well aware that its client, BlockFi, had an extremely adversarial relationship with the FTX group. On the compensation request submitted by Sullivan & Cromwell to the bankruptcy court last Wednesday, for legal work it performed for the FTX group in the last 19 days of November, the name BlockFi appears 57 times. In 6 of those instances, the billable hours were described as involving the “BlockFi adversary proceeding” or “BlockFi adversary action.” For example, on November 30, Sullivan & Cromwell law partner, Brian Glueckstein, billed 3.2 hours for what he described as follows:
“Analysis and strategy re: BlockFi claims (.80); call with S&C and Haynes Boone teams re: BlockFi claims issues (.50); follow-up correspondence to S&C team re: same (.20); meetings with A. Dietderich re: BlockFi claims (.40); correspondences to S&C team re: BlockFi adversary proceeding (.40); meeting with A. Dietderich and J. Bromley re: BlockFi strategy issues (.40); meeting with M. Porpora re: BlockFi adversary proceeding (.50).”
From November 12 through November 30 (which is the only compensation request that Sullivan & Cromwell has presented to the FTX bankruptcy court thus far) the law firm billed a total of 50.3 hours of work related just to BlockFi. At its indicated “blended hourly rate” of $1,452.41, that’s more than $73,000 involving an “adversary proceeding” when the law firm had told the court on December 21 that “S&C does not represent any person or entity having an interest adverse to the Debtors.” (Sullivan & Cromwell’s total compensation request came out to more than $7.6 million for the 19-day span.)
What is this adversary proceeding all about? BlockFi is claiming ownership of more than half a billion dollars in publicly-traded shares of Robinhood, a trading app, which were 90 percent-owned by Sam Bankman-Fried through an offshore vehicle called Emergent Fidelity Technologies, Ltd. The shares were pledged as collateral for $680 million in loans that Alameda Research owed BlockFi.
Judge Dorsey was put on notice of this adversary proceeding on January 5 of this year when Richard Anigian, a law partner at Haynes and Boone, LLP, filed a declaration in Dorsey’s court explaining the situation along with documentation that tallied up to 372 pages.
Sullivan & Cromwell has conceded in a court filing that it represented Bankman-Fried in connection with this Robinshare share purchase. Making that transaction even more fraught for Sullivan & Cromwell is the fact that the Department of Justice believes that Sam Bankman-Fried may have been attempting to hide that half billion dollars he held in the publicly-traded common stock of Robinhood by setting up the offshore vehicle, Emergent Fidelity Technologies Ltd. in Antigua, to hold the shares. The registration for Emergent Fidelity Technologies, Ltd. was filed on April 22, 2022 in Antigua. Federal prosecutors for the Southern District of New York wrote in a letter on January 30 of this year that “the original circumstances of the purchase of these shares, through a foreign special purpose vehicle with no public connection to FTX or Alameda, further indicate the steps the defendant has taken to obscure his criminal misuse of FTX customer property.”
The documentation on how this transaction went down is a window into what was going on under the nose of Sullivan & Cromwell’s former partner, Ryne Miller, who became General Counsel to FTX US in August of 2021.
Although Miller was General Counsel to FTX US, not Alameda Research or Emergent Fidelity Technologies Ltd., he listed himself as the contact person on the Securities and Exchange Commission filing for this Robinhood stock purchase.
Presumably, Miller should have inquired into how Bankman-Fried came by this more than half a billion dollars to buy 56 million shares of Robinhood stock. That’s not a pretty picture either.
Caroline Ellison, the woman who was reportedly at some point sleeping with Sam Bankman-Fried in his penthouse in the Bahamas, that was shared with other FTX executives, signed two loans from Alameda Research to Sam Bankman-Fried in April and May of 2022. The loans totaled $491.7 million. Ellison signed the promissory notes for these loans as Co-CEO of Alameda Research. Ellison also signed the pledge agreement to BlockFi as Co-CEO of Emergent Fidelity Technologies, Ltd. despite the fact that the Bylaws for Emergent list officer positions of President, Treasurer, Secretary, etc. but no such position as CEO or Co-CEO. Bankman-Fried is listed as the sole Director of Emergent.
According to the complaint against Sam Bankman-Fried filed by the Commodity Futures Trading Commission (CFTC), it is highly likely that the loans made to Bankman-Fried from Alameda Research came from looted customer funds. The CFTC writes:
“…without disclosure to FTX customers, Alameda and FTX commingled assets and freely used FTX customer assets as if they were their own, including as capital to deploy in their own trading and investment activities. On information and belief, Bankman-Fried, his parents and other FTX and Alameda employees used FTX customer assets for a variety of personal expenditures, including luxury real estate purchases, private jets, documented and undocumented personal loans and personal political donations.”
According to testimony provided to the House Financial Services Committee on December 13, $8 billion of customer funds are missing at the FTX group of companies.
One of those customers, Warren Winter, filed a written objection with the bankruptcy court to Sullivan & Cromwell serving as lead counsel in the bankruptcy case. Winter wrote:
“Sullivan & Cromwell was one of the FTX Group’s ‘primary external law firms’ before the FTX Group collapsed. To date, the FTX Group has paid the firm more than $20.5 million in fees and retainers. Now, in the most flagrant attempt by a fox to guard a henhouse in recent memory, Sullivan & Cromwell has applied to be appointed the FTX Group’s bankruptcy counsel with duties that would include ‘investigating all potential estate causes of action’….”
Unfortunately for FTX customers, Judge Dorsey appears inclined to gloss over serious conflicts of interests involving Sullivan & Cromwell like he’s shooing away gnats on a summer’s day. (See 18 States Send a Message to FTX Bankruptcy Judge John Dorsey: We’re Watching You and Numerous Big Law Firms Had Zero Ties to Sam Bankman-Fried; So Why Did John Ray Hire Two Deeply Conflicted Law Firms?)
This first appeared on Wall Street on Parade.