Law Firm Sullivan & Cromwell LLP and FTX

Law firm Sullivan & Cromwell LLP did not overlook “red flags” about the crypto exchange FTX while advising its CEO Sam Bankman-Fried on purchasing Robinhood shares prior to their subsequent decline, as stated in an examiner’s report by Robert Cleary.

Background

In his first report published in May, Cleary recommended an investigation into Sullivan & Cromwell’s representation of Bankman-Fried in relation to his acquisition of Robinhood Markets, Inc. shares. Currently, Sullivan & Cromwell advises FTX in its ongoing bankruptcy proceedings, which began in 2022.

Bankman-Fried, who controlled Emergent Fidelity Technologies Ltd., which held Robinhood shares, received legal assistance from Sullivan & Cromwell. In May 2022, he acquired over 7% of Robinhood’s stock, valued at approximately $648 million at the time, according to various news reports.

However, by the end of 2022, FTX collapsed along with its sister trading firm Alameda Research, leading to multiple claims on the shares from various parties, including FTX, Bankman-Fried, and BlockFi.

Findings

Cleary indicated that Sullivan & Cromwell did not ignore any “red flags” that might have indicated misconduct by FTX or any possible conflict of interest when advising Bankman-Fried regarding the Robinhood shares, as highlighted in his report submitted on Wednesday.

Bankruptcy Judge John Dorsey appointed Cleary, who previously prosecuted the Unabomber case in the late 1990s, as the independent examiner following an appeals court ruling in January for an investigation into FTX.

Sam Trading Question

In April 2022, general counsel for FTX.US, Ryne Miller, emailed partners at Sullivan & Cromwell concerning a prospective acquisition of a significant position in a publicly traded company, titled “Sam trading question.”

According to the report, the attorneys from Sullivan & Cromwell mentioned that they found it unremarkable that Miller, an employee of the FTX Group, reached out concerning Bankman-Fried’s personal investments, recognizing that the FTX Group was primarily owned by him and that wealthy individuals commonly engage their corporate staff in such matters.

The FTX lawyers acknowledged the necessity for a Form 13D to be filed, indicating a person acquiring over 5% of a company’s voting shares.

Miller communicated that Bankman-Fried was comfortable being named in the 13D filing, but preferred Alameda not be mentioned.

The attorneys noted that it was typical for wealthy clients to prioritize confidentiality for legitimate reasons. Based on his investigation and professional expertise, Cleary found this explanation plausible and concluded that there was no red flag ignored by Sullivan & Cromwell that warranted further inquiry.