It’s Crazy to let Sullivan & Cromwell Oversee the FTX Bankruptcy

The FTX bankruptcy is costing FTX creditors $1.4 million a day. $1.4 million a day. That is how much is being spent by John Ray III, Sullivan and Cromwell, their various investment bankers, et cetera, et cetera. They've racked up nearly half a billion dollars in fees and expenses in the first year of this bankruptcy.

To put this into perspective, the Celsius bankruptcy had about $5.5 billion in liabilities and spent $87 million or so in the first six months of that bankruptcy process. FTX in the first six months of a bankruptcy that had rounding up to $9 billion in liabilities spent nearly $200 million.

If you assume that this bankruptcy lasts for about two years, which is what happened for Enron and others at the current run rate, this bankruptcy will cost $800 million. The Enron bankruptcy lasting two years cost in 2023 dollars, $1.1 billion, just $300 million more, despite the fact that Enron was a hundred times the size of FTX.

Now, John Ray and Sullivan and Cromwell and all of these folks will say, "Well, this is a particularly complicated bankruptcy." FTX was a mess of a company. Sam Bankman-Fried didn't know what he was doing. It was totally disorganized. There's terrible record keeping. We don't understand where all the money is. And on top of that, it's cryptocurrency. Crypto is so complicated and so hard to understand. And oh my gosh, it makes it so much more complicated. And like, I don't know, maybe, sure, I guess, I'm sure there is some level of truth to that.

But forgive me if I don't feel altogether trusting of John Ray III and Sullivan and Cromwell, when frankly, I question whether Sullivan and Cromwell in particular should be the debtor's counsel on this bankruptcy to begin with, given the fact that they represented FTX during its heyday.

Now this is also something Sullivan and Cromwell will push back on. And clearly they've convinced a judge that it is fair game and reasonable for them to be debtor's counsel here. But I'm still not convinced.

And that is the topic of today's episode. I would love to know your thoughts. Certainly by the time we finish this, do you think that it's fine that Sullivan and Cromwell stay in charge? Do you think they should be removed? If you have been enjoying this content, I would appreciate if you'd subscribe to the channel, leave a comment, subscribe to the podcast, like, whatever you can do, I appreciate it.

All right, let's dive into it.

So backing up for just a moment to November of 2022, the month when everything started imploding for FTX. On November 8th and 9th, you have two important people resign. You have Can Sun, who is the General Counsel for FTX international. He resigns. And you have Dan Friedberg, who was the Chief Compliance Officer for FTX. He resigns.

This leaves a man named Ryan Miller, who was general counsel for FTX US, as arguably the most senior lawyer in the entire FTX organization. Now, Ryan Miller is like a bear of a man. He's very grizzled and he's kind of big and got this bearded situation going on. And he was formerly a partner at Sullivan and Cromwell. And by some accounts remained fairly loyal to Sullivan and Cromwell, even after he joined FTX.

In a statement that he submitted to the court, Dan Friedberg, former Chief Compliance Officer for FTX, said that Ryan Miller made comments to Dan saying that it was very important that he, Ryan, channel as much business as possible to Sullivan and Cromwell, because Ryan hoped to return to Sullivan and Cromwell as a partner after his stint at FTX.

Obviously, that's not something you love to hear as a business. You don't want to think that your general counsel is also in the pocket of another firm.

And yet I do think there's evidence, even outside of Dan Friedberg's word here, that Ryan was particularly sympathetic to his former employer. And we'll get to some of that.

But sticking with where we are in the timeline here in November of 2022. So Ryan Miller is now the senior most lawyer and legal mind at FTX. And things are spiraling. Binance pulls out of the deal, says they're not going to buy FTX. And so bankruptcy is increasingly looking like the only option. Now, there's questions around some of this as well, of course. And there are people who will say that, you know what, FTX and certainly FTX U.S. didn't maybe need to file for bankruptcy at all. And as we see all of the money that seems to be coming out of the fucking couch cushions at FTX, there's a reason to think that they might have been right, that this bankruptcy wasn't entirely necessary.

But I will fully give the benefit of the doubt. And I believe that at the time there was so much confusion that a lot of these lawyers believed that bankruptcy was certainly the best option. And there were things happening internationally where you had the country of Australia, for example, forcing their local FTX Australia company into insolvency and things were happening. Dominoes were falling. That certainly indicated trouble was brewing and bankruptcy and a cohesive U.S. based bankruptcy might be the best option.

Ryan Miller, now senior most legal minded FTX, turns, of course, to his old firm, the firm that, according to some, he remained loyal to. He turned to Sullivan and Cromwell to help steward the bankruptcy proceedings and what he assumed would ultimately be the bankruptcy itself. And as Sullivan and Cromwell stepped up to the plate, they first and foremost pressured Sam, Bankman-Fried, to step down, saying, I'm sure reasonably, we need a real adult in the room, not you, you 28 year old child who has blown up this company and flushed away like $40 billion in shareholder value.

Now, Sullivan and Cromwell's recommendation was that John Ray III step up and become the new CEO and shepherd FTX during this next phase of its disillusionment, really. Once again, Dan Friedberg in a statement he submitted to the court said that he heard Ryan Miller refer to John Ray III as Sullivan and Cromwell's guy. Which on its face isn't necessarily problematic, but in totality, you just have the feeling that there is insider dealing happening here and a little bit of you scratch my back, I'll scratch yours.

So their guy, Sullivan and Cromwell's guy, John Ray III is officially put in charge of everything and in the wee hours of the morning on November 11th, after Sam Beckman Fried signs an omnibus agreement at like 4.30 AM giving John Ray III complete power over all of FTX international entities, FTX US, et cetera, et cetera.

John Ray, who is now in charge of everything at the recommendation of Sullivan and Cromwell, of course returns the favor and appoints Sullivan and Cromwell to be the debtor's counsel.

Now this is where we get the first glimpse of the you scratch my back I'll scratch your back phenomenon, which is that Sullivan and Cromwell, regardless of how involved they were in FTX's business during their heyday. And there is debate about this. They will claim, as we'll discuss, they were not very involved. I'll argue while they were more involved than I think they have said, regardless of any of this, it just seems like there's obviously a potential conflict of interest there since they did have a certain amount of involvement with FTX during its life cycle as a company. That it just feels like if somebody was being independent minded about it, they probably wouldn't appoint Sullivan and Cromwell to be the lawyers to take this process from here.

Any number of law firms would have been more than happy to step up to the plate and manage this billion dollar bankruptcy. And I'm sure they could have gotten caught up just as quickly as Sullivan and Cromwell did in the 48 hours notice that Sullivan and Cromwell had to really kick off this bankruptcy.

And now I'm not the only person for whom this rubbed the wrong way. In fact, you did have objections raised to Sullivan and Cromwell being debtor's counsel by a number of folks. You had the U.S. trustee to this whole process object. You had the former FTX chief compliance officer, Dan Friedberg object. You had FTX creditors object. And you even had a letter written by a bipartisan group of senators that was sent to judge Dorsey, the judge in this case, saying that they didn't think it was appropriate that Sullivan and Cromwell remain on as the debtor's counsel.

But by the time that judge Dorsey was hearing these arguments, we were several months past the point when they had been appointed. And so now by this point, you have had two or three months of work underway by Sullivan and Cromwell, as opposed to just the 48 hours of work that they had done initially. And so I believe Judge Dorsey was sufficiently swayed by Sullivan and Cromwell's argument that they weren't that involved in FTX and figured that by that point, it would be better for the creditors and less wasteful money wise not to bring in an entirely new firm to get up to speed on everything that had happened so far and in some ways restart the process.

I've also spoken to a bankruptcy lawyer and a law professor who has been following this case and is an expert in bankruptcy who talked about how debtors have a lot of power in the court system during a bankruptcy. And in this case, FTX is the debtor. So the fact that you have John Ray III, for example, and others vouching for Sullivan and Cromwell that weighs heavily in the mind of the judge.

So let's talk about what Sullivan and Cromwell has argued on their own behalf. And again, you can judge for yourself what you make of this whole situation.

All right. The cornerstone, the backbone of the argument by Sullivan and Cromwell was put forth by Andy Dietderich, who is a partner at Sullivan and Cromwell. And Andy Dietderich is the person who submitted a bunch of files to the court on behalf of Sullivan and Cromwell, making the argument as to why it really wasn't a conflict of interest and why it would be totally appropriate for Sullivan and Cromwell to remain the debtor's counsel in the FTX bankruptcy.

And specifically, he said that FTX was not a regular client of Sullivan and Cromwell, hadn't been a regular client of Sullivan and Cromwell while the company was still alive. He specifically said that FTX was a particular matter client for Sullivan and Cromwell. Basically the idea being that Sullivan and Cromwell had worked on some isolated, discrete issues for FTX. But again, they were like isolated. They were their own thing. They weren't involved in the broader business. And so certainly there are no conflicts of interest there.

Now, even if you take that at its word, it still strikes me that if you were a law firm that touched this company, you shouldn't be the counsel for the bankruptcy. There were plenty of law firms that never worked with FTX and any number of them would be highly qualified to shepherd this bankruptcy into its next phase. It just feels like why even risk the appearance of impropriety.

But that aside, Sam Bankman-Fried and others has said that this characterization, this particular matter client characterization of the relationship between Sullivan and Cromwell and FTX is misleading at best and an outright lie at worst. And while I obviously acknowledge that Sam Bankman-Fried is perhaps not the most reliable narrator to any of us at this point, I can't help but feel that his version of these events actually makes more sense to me.

Ryan Miller and Tim Wilson, who were two very senior attorneys for FTX, both came from Sullivan and Cromwell. Sam and another senior FTX official who was not named, but who apparently spoke to the Financial Times, both said that Sullivan and Cromwell was the primary outside counsel for FTX US, specifically FTX US. Sam said that he regularly worked out of the Sullivan and Cromwell offices in New York city when he visited the city for business. And the other senior official at FTX, who again, was not named by name from the, in the Financial Times, but who apparently spoke with them, said that FTX US worked with Sullivan and Cromwell on a near daily basis.

Now, if you're skeptical of all that, okay, but consider this. Public records show that between June of 2021 and November, 2022, Sullivan and Cromwell billed FTX $8.6 million.

That's what they charged for their services. Now for this bankruptcy process, we know that they are charging a little over $2,000 for the most senior work that gets done. There's pay rates that vacillate. The hourly rates shift a little bit if you have lower level employees working on it versus higher level employees, but even at the highest pay rate, the $2,000 or so rate, $8.6 million translates into 4300 hours of work between June of 2021 and November, 2022. That's 4300 hours of work in 76 weeks, if you assume no weeks off, which comes to about 55 hours of work a week for a year and a half straight, assuming you were billing at the partner rate.

That certainly sounds like a law firm that would have been in regular contact with FTX, but of course it's actually more complicated than this because the truth is the work that Sullivan and Cromwell did for FTX was not actually always billed on an hourly basis.

And so the math I just gave you while I still think illustrative for certain purposes is not really what we're talking about. We know one example in particular where Sullivan and Cromwell didn't bill by the hour, and that was, we know that they were hired by FTX and Alameda, some combination, maybe it was just Alameda, to bid on assets as part of the Voyager bankruptcy that was going on.

And here's what Dan Friedberg had to say about that situation. He said, "Sullivan and Cromwell represented Alameda for a few months on this matter," that is this bidding on bankruptcy assets, "without tendering a bill. I saw that there was an unnecessary number of Sullivan and Cromwell lawyers working on the matter and assumed that it would be a high bill and expected a cost of $500,000. This sounds like a shocking fee, but this would be normal for Sullivan and Cromwell. Andy Dietderich", again, we've mentioned him before, "sent me a bill for $6.5 million as a flat fee for the entire matter. I was absolutely shocked and told him that we only pay by the hour. To be clear, Alameda engaged Sullivan and Cromwell to place bid on assets in a bankruptcy that took a few months and they charged $6.5 million for the matter. I told Ryan Miller to fix the problem,". Again, Ryan Miller, formerly a partner of Sullivan and Cromwell, now works for FTX, FTXUS specifically. "I, Dan Friedberg, told Ryan Miller to fix the problem and Mr. Miller told me that we should help Andy, Andy Dietderich, on this as he needed the bankruptcy work. I angrily told Mr. Miller to get them to bill us by the hour or I would have to involve Sam,". So when he talks about bankruptcy work in that moment, he's talking about the Voyager bankruptcy work. That's in connection to the fact that Voyager was in bankruptcy and they were bidding on assets as part of the Voyager bankruptcy. "Mr. Miller told me not to tell Sam and promised to fix the matter. I later learned that Ryan Miller authorized payment of $2.5 million to Sullivan and Cromwell for the matter. This was a significant amount more than the work performed and the fees were not reasonable. The overbilling is unethical and needs to be recouped,".

Now this last point I think is really important and I'm going to get to it in just a moment, but I just want to say that this statement by Dan Friedberg, who like Sam, some would consider a very unreliable narrator, is backed up by records that Andy Dietderich ended up presenting to court in which you can see that Sullivan and Cromwell was paid $2.25 million in November of 2022 for work that was performed between July and September of that year, which would have been the few months around the Voyager bankruptcy.

So that all checks out. I mean, Dan Friedberg said that he was later told that the amount was $2.5 million, the records would show it's $2.25 million. I think that's a totally negligible difference in terms of the point here.

So again, I'm not saying that Dan Friedberg and everything he has said to the courts is a hundred percent right or isn't a partial version of the truth or that you should even singularly believe Dan Friedberg, whose reliability has again been called into question given that he was the Chief Compliance Officer for FTX.

But I am saying that Sullivan and Cromwell build FTX for $8.6 million between June of 2021 and November of 2022. And you either have one of two things here, in my view, you either have an amount of hourly work that is a stunning amount of hours put into work for this company in that year and a half for a law firm that wants to simultaneously claim they were not involved with FTX in any sort of meaningful way. Or, I have to agree with Dan that you have some sort of over billing happening here. I get that these law firms are expensive, but I'm sorry, like $6.5 million that gets, I guess, negotiated down to $2.5 million for a couple months work bidding on assets, does seem ridiculous.

And let's not pretend we don't know that all of these law firms definitely overbill all the time and fine, we all just deal with it, except that in this case, Sullivan and Cromwell are now the law firm that is in charge of going after firms, vendors et cetera, that FTX dealt with who may be overbilled in some way, trying to recover those assets.

So I know I just said a lot of things there, but if you didn't follow it, Sullivan and Cromwell as debtors council, their job right now is to recover losses that FTX suffered. So they are suing people like Sam's parents, for example, over $10 million that Sam's parents were gifted by Sam, some of which I believe was actually kept on the FTX exchange. So the amount of money they can actually recover from Sam's parents is, I think closer to like $5 million and they're charging a million and a half dollars a day basically to run this bankruptcy.

In any case, the point being they're going after those kinds of small sums of money from groups, individuals, Modulo Capital, they're going after, et cetera, trying to claw back these funds that were spent by FTX since FTX we know was spending not their own money in most cases.

And it may or may not be reasonable to go after some level of overbilling by Sullivan and Cromwell, but the problem is that Sullivan and Cromwell is the one making that determination and obviously they're not going to go after their own firm for money.

What you would want is an independent outsider, an independent law firm, looking at the situation and making the determination on what is best for the creditors for FTX, should they go after Sullivan and Cromwell for overbilling.

And to add insult to injury, forget even the idea of having a different law firm step in and oversee this process. Cause that would obviously be the ideal, but that needed to happen a long time ago. We are now a year into this very, very expensive bankruptcy and it doesn't make sense to swap law firms now, but there's another option. Something that is very common in bankruptcies, certainly bankruptcies of this size, what we have seen with Enron, with Lehman, et cetera, is that you bring in an independent examiner who comes into the bankruptcy proceedings and just keeps an eye on everything. Makes sure that things are being done appropriately.

Sullivan and Cromwell have gotten a lot redacted on documents that have been made public as part of this bankruptcy. They've had a lot of things sealed, even files that ordinarily aren't sealed in a bankruptcy proceeding. I had somebody tell me that this was the least transparent bankruptcy they've ever seen. And this was somebody who works on a lot of bankruptcies. So an independent examiner could come in and even outside of the fee issue, look at things like that and say, Hey, is this appropriate or is there anything they're covering up because there are things that they were involved in with FTX that they're not proud of, for example.

But unsurprisingly, Sullivan and Cromwell heavily fought the idea of bringing in an outside examiner into this whole proceeding. In fact, they fought it in court pretty vigorously arguing that an independent counselor can be very expensive. They said that the independent examiner in the case of Enron cost $100 million and they didn't want to spend $100 million of customer money.

I previously spoke with an FTX creditor named Pat Rabbitte, and we spoke a little bit about this argument by Sullivan and Cromwell that there shouldn't be an independent examiner because it would cost the creditors too much money. Here's what Pat had to say about that:

<Audi Clip - Pat Rabbitte> - "Carly, I've been a while on this planet and the longer I'm here, the more cynical I get about things. Look at the amount of money that they've clocked up. It's just out of this world. Nobody could possibly believe that assertion on their behalf. Maybe if somebody else said it, but not from them,".

And again, I'm inclined to agree here. I don't think Sullivan and Cromwell was arguing to not have an independent examiner because they didn't want more money spent. I'm sure maybe that's a piece of this. I'm not going to say that's not a piece of it. I think they didn't want somebody watching their work. I don't think they wanted somebody coming in and overseeing what and how they were doing what they were doing.

But again, they won the argument ultimately in court.

As one journalist, Libby Lewis put it in one of her articles. Why did FTX fail? A judge is letting FTX itself decide. With the implication there being that in addition to wanting an independent examiner to come in to look at things like the fees, though it's important to note there is a separate fee examiner who is specifically looking at how much money is being spent, but that fee examiner was named by Sullivan and Cromwell.

So again, you have this like incestuous pool of people where it's like, I scratch your back, you scratch mine. In any case, in addition to wanting an independent examiner to come in and look at all of that, you would also want them there to look at things I mentioned before. Like are these redactions appropriate? Are these sealed documents appropriate, et cetera, et cetera.

Now look, I have been diving into as much as I can about this bankruptcy. And there are a lot of rabbit holes to go down. There are a lot of theories swirling around about Sullivan and Cromwell and this bankruptcy, and I just don't feel like there's enough of a smoking gun yet that I feel comfortable putting some of those theories out there yet because I worry that it would maybe be a little bit irresponsible, even if I was clear that I think they're still just theories.

My mind might be changed on that. I don't know. I'm like going back and forth on it.

In any case, with that said, I've seen the media in a couple of places calling John Ray's updates to the public victory laps. You know, they've found $5 billion now. They found $9 billion worth of assets. They keep uncovering all this money. And my feeling is like, no, excuse me. If I don't join John Ray III and Sullivan and Cromwell and the investment bankers in their celebration of how good they've been at collecting money back for FTX creditors, a lot of this seems to have been finding money in couch cushions and picking it up.

At the rate that they're billing, they should be able to engage in an honest conversation about property rights. And if you don't know what I'm talking about, you can check out a video I posted this week talking all about it up there or somewhere.

All right, folks, that is today's episode. I hope you enjoyed it. My one camera went out part of the way through recording this. It's broken. I'm getting it shipped off to get it fixed. If you've heard me complaining about tech issues recently, we're still dealing with them, but we're getting them fixed. So this is a one camera day. And I appreciate you sticking with it. If you're still here. If you do enjoy this content, please consider subscribing, liking, leaving a comment, all of the things, you know how it goes. And with that, I will see you next time.