FTX Creditors Sue Law Firm for Alleged Role in Crypto Fraud Scheme

FTX, a crypto exchange that filed for bankruptcy in December 2023, is facing a new legal challenge from its creditors. They have accused the law firm that is handling the bankruptcy case, Sullivan & Cromwell (S&C), of being complicit in FTX’s fraudulent activities and profiting from them.

S&C Accused of Civil Conspiracy and Aiding and Abetting Fraud

According to a class-action lawsuit filed on February 16, FTX creditors claim that S&C had knowledge of FTX’s misconduct and misappropriation of funds belonging to class members. The lawsuit alleges that S&C actively participated in FTX Group’s multibillion-dollar fraud and benefited financially from it.

The lawsuit seeks damages on several counts, including civil conspiracy, aiding and abetting fraud, and aiding and abetting fiduciary breaches. The creditors allege that S&C agreed, at least impliedly, to assist FTX’s unlawful conduct for its own gain.

The lawsuit also highlights the close relationship between former FTX CEO Sam Bankman-Fried and S&C, noting that Bankman-Fried often worked in the law firm’s New York offices. The creditors claim that S&C gained detailed knowledge about the financials of Bankman-Fried and FTX through their representation of him in various deals, such as FTX’s asset bid for Voyager Digital Holdings and the acquisition of LedgerX.

S&C Denies Any Wrongdoing and Defends Its Role in the Bankruptcy Case

In response to the allegations, a spokesperson for S&C has denied any wrongdoing. The spokesperson said that the firm had never served as primary outside counsel to any FTX entity and had only a limited and transactional relationship with FTX and its affiliates prior to the bankruptcy.

S&C has been overseeing the FTX bankruptcy proceedings, which have been marred by controversy and scrutiny. In January 2023, a bipartisan group of US senators wrote to the judge, requesting an independent examiner, as they believed the law firm was not capable of uncovering the necessary information to ensure confidence in any investigation or findings.

S&C’s fees for the bankruptcy case are estimated to reach hundreds of millions of dollars. The law firm has also been accused of having a conflict of interest, as it was previously connected to FTX through Ryne Miller, a former partner at S&C who joined the FTX Group as general counsel in August 2021. It is alleged that Miller redirected at least 20 cases from FTX to his former law firm.

FTX’s Fraud Scheme Involved Diverting Customer Funds to Alameda Research

FTX, based in The Bahamas, raised more than $1.8 billion from equity investors, including approximately $1.1 billion from approximately 90 US-based investors. In his representations to investors, Bankman-Fried promoted FTX as a safe, responsible crypto asset trading platform, specifically touting FTX’s sophisticated, automated risk measures to protect customer assets.

However, in reality, Bankman-Fried orchestrated a years-long fraud to conceal from FTX’s investors the undisclosed diversion of FTX customers’ funds to Alameda Research LLC, his privately-held crypto hedge fund. The SEC charged Bankman-Fried with defrauding investors in FTX in December 2022, alleging that he used commingled FTX customers’ funds at Alameda to make undisclosed venture investments, lavish real estate purchases, and large political donations.

The SEC also alleged that Bankman-Fried gave Alameda special treatment on the FTX platform, including providing Alameda with a virtually unlimited “line of credit” funded by the platform’s customers and exempting Alameda from certain key FTX risk mitigation measures. The SEC claimed that FTX’s exposure to Alameda’s significant holdings of overvalued, illiquid assets such as FTX-affiliated tokens posed undisclosed risk to the platform and its investors.

The FTX bankruptcy case is one of the largest and most complex in the history of the crypto industry. It involves thousands of creditors, hundreds of millions of dollars in claims, and dozens of legal disputes. The role of S&C in the case is now under question, as the creditors seek to hold the law firm accountable for its alleged involvement in FTX’s fraud scheme.