he relationship between FTX and New York-based law firm Sullivan & Cromwell dates back to August 2021, when the exchange hired former S&C lawyer Ryne Miller as its general counsel. Through Miller, S&C served as outside counsel on over 20 matters for FTX, with at least three attracting fees over $1 million. This included advising on the acquisition of futures exchange LedgerX and representing FTX in its attempted $1.42 billion purchase of Voyager's assets.
The petition alleges S&C was aware of dubious activities through these dealings, such as a "backdoor" allowing FTX to direct customer funds to Alameda Research. S&C also knew of a code that enabled Alameda to avoid auto-liquidation with negative balances. Despite this knowledge, S&C continued vouching for FTX's "good standing" and "compliance with laws" in transactions like the LedgerX deal.
Accusations of Complicity
The close relationship and S&C's apparent knowledge of fraudulent activities underpin the accusations leveled against the law firm. Creditors are pursuing S&C on claims of civil conspiracy, aiding and abetting fraud, and aiding and abetting fiduciary fraud. They argue S&C remained FTX representatives despite understanding the deceitful nature of its business practices and the misuse of customer funds.
Implications for Bankruptcy Proceedings
The lawsuit raises serious questions around S&C's role in handling FTX's ongoing bankruptcy case. As the appointed representatives, S&C is meant to ensure proceedings follow established protocols with impartiality. However, creditors argue S&C's previous work so closely with FTX and Bankman-Fried creates an inherent conflict of interest. Depending on the outcome, the case could potentially impact S&C's ability to continue overseeing the bankruptcy process.
Industry-Wide Repercussions
The lawsuit illustrates heightened scrutiny of professional services firms tied to collapsed cryptocurrency companies. As legal and financial advisers, these partners wield influence and access that could enable — or turn a blind eye toward — fraudulent activities. Even the perception of complicity seriously damages credibility. Going forward, regulatory compliance and robust due diligence practices may be more critically evaluated by clients, investors and government agencies to prevent similar collapses and protect consumers.
