FTX examiner recommends further investigation into shortfalls, S&C’s legal representation News ▸ US ▸ FTX ▸ Bankruptcy
FTX examiner recommends further investigation into shortfalls, S&C’s legal representation
The examiner emphasized the necessity of three primary investigations to further clarify the circumstances surrounding FTX Group's downfall.
2 min read
Updated: May. 23, 2024 at 10:25 pm UTC
Cover art/illustration via CryptoSlate. Image includes combined content which may include AI-generated content.
The court-appointed examiner, Robert J. Cleary, has released a detailed report recommending additional investigations into several aspects of the collapsed FTX Group, particularly focusing on FTX.US, its asset management practices, and its legal representation by Sullivan & Cromwell (S&C).
Cleary’s report, submitted to the US Bankruptcy Court for the District of Delaware, outlines the necessity of three primary investigations to further clarify the circumstances surrounding FTX Group’s downfall.
Shortfalls
The first key recommendation centers on FTX.US balance sheet shortfalls. The report highlights significant concerns over recurring “holes” or shortfalls in FTX.US’s balance sheet.
These gaps, particularly evident in November 2022, suggest possible commingling of customer and corporate assets — indicating a potential misuse of funds.
The examiner emphasized the need for a comprehensive investigation to determine the causes, frequency, and resolution of these shortfalls, which may uncover additional misconduct and bolster public confidence in the bankruptcy process.
The examiner also recommended a probe into the pre-bankruptcy sale of Ledger Holdings Inc. (LHI) to West Realm Shires Inc., seeking to identify potential avoidance actions against former shareholders who might still hold claims against the estate.
The inquiry could provide deeper insights into the transactions leading up to the bankruptcy and uncover additional assets for recovery.
S&C’s representation
The examiner called for a focused inquiry into the role of Sullivan & Cromwell LLP (S&C), the law firm representing FTX, particularly concerning its representation of Sam Bankman-Fried during his purchase of Robinhood shares.
The investigation aims to determine whether S&C was aware of the fraudulent activities within FTX and whether there were any conflicts of interest that the court should have considered when approving their retention as counsel.
If S&C’s representation of Samuel Bankman-Fried during his purchase of Robinhood Markets shares is found to be improper or conflicted, it could have legal and financial implications for Bankman-Fried and other individuals involved.
This might include revisiting the transactions and potentially reversing or renegotiating terms. It would also disqualify the law firm from representing debtors further in the bankruptcy proceedings.
S&C controversy
S&C’s broader representation of FTX has generated significant controversy. Bankman-Fried claimed S&C pressured him into bankruptcy to earn legal fees in December 2022, while former FTX CTO Daniel Friedberg alleged misconduct in January 2023.
Reports in 2023 indicated that S&C billed FTX approximately $70 million over five months of bankruptcy proceedings. As of April 2024, the firm has charged $170 million in cumulative fees, according to Bloomberg.
The matter entered civil courts in February 2024, as former FTX investigators filed a class action suit alleging the firm aided FTX’s wrongdoing.
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Author 
Mike Dalton
Before transitioning to crypto writing in 2018, Mike studied library and information sciences. Currently, he resides on Canada's West Coast.
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FTX
FTX is a defunct cryptocurrency exchange, currently in bankruptcy proceedings, that was founded by Sam Bankman-Fried and Zixiao “Gary” Wang in May 2019.
Robinhood
Robinhood is an American financial services company headquartered in Menlo Park, California that was founded in April 2013 by Vladimir Tenev and Baiju Bhatt.
Sam Bankman-Fried is the former CEO, and co-founder of defunct crypto exchange FTX and Alameda Research.