Attorneys representing the failed FTX exchange can continue handling its bankruptcy proceedings, despite highly charged claims regarding the law firm’s tactics.
Last Friday, January 20, a U.S. bankruptcy court in Delaware held a hearing into the bankruptcy of FTX, FTX’s affiliated market-maker Alameda Research and the countless other appendages of the once mighty crypto empire of Sam Bankman-Fried (SBF).
The hearing was to determine whether the law firm of Sullivan & Cromwell (S&C) would be appointed counsel for the reconstituted FTX, now under the court-appointed leadership of one John J. Ray III. With FTX owing its creditors billions of dollars that it didn’t have when it filed for Chapter 11 protection in November, the fight over every penny in assets is understandably fierce.
The hearing was preceded by a filing by Daniel S. Friedberg, who formerly represented FTX and Alameda in various legal roles, including as FTX’s chief compliance officer. We’ll explore Friedberg’s filing in a moment, but it echoed concerns submitted to the court earlier this month by a group of U.S. senators expressing “serious questions about [S&C’s] involvement” in FTX both pre- and post-bankruptcy.
Judge John Dorsey wasn’t buying any of it on Friday, at least, not enough to keep S&C on the sidelines. Dorsey said the objections to S&C’s involvement amounted to “hearsay, innuendo, speculation, rumors, and certainly not something I would allow to be introduced into evidence.”
Finding “no evidence of any actual conflict here,” Dorsey noted that, in such an expansive bankruptcy case, “it would be difficult to find debtors’ counsel that didn’t have other clients who might be clients of the Debtors’ counsel.”
James Bromley, a partner at S&C, expressed irritation in court regarding SBF’s continued social media sniping and longer-form missives on SBF’s new Substack account. Bromley said it was “very difficult, your Honor, to cross examine a tweet … those who have things to say should come to court and say those things.”
SBF v S&C
SBF couldn’t show up in Delaware to support his assertions regarding S&C’s integrity because he’s under house arrest at his parent’s home in California while he awaits the start of his criminal trial.
SBF was arrested in the Bahamas the day before he was to testify remotely to the U.S. House Financial Services Committee regarding FTX’s collapse. But the testimony he planned to give to the Committee did make it into the public sphere.
Among the claims SBF made in his written testimony was that he agreed to file for bankruptcy protection “under extreme pressure” from S&C, which represented both FTX International and FTX’s U.S.—facing exchange FTX.US. Pressure also allegedly came from Ryne Miller, general counsel of FTX.US and a former S&C partner.
S&C allegedly told SBF’s personal attorney that he would get to choose the new chair of FTX’s board, but S&C “silently reneged on that a few days later.” SBF further alleges that it was S&C who chose John J Ray to run FTX’s “Chapter 11 team” and that “Ray and his team” chose S&C as the Chapter 11 team’s legal counsel.
SBF’s testimony included a screenshot of a November 8 text message that Miller sent to “much of FTX’s leadership” in which he declares: “I’m in charge now.” Miller was trying to identify who could wire $4 million “from FTX.com cash” to S&C “to make sure we are all represented through this. And we preserve any value that is left.”
Friedberg: other lawyers are worse
Friedberg’s filing supports many of SBF’s assertions regarding S&C while adding even more alarming details. It should be noted that Friedberg is cooperating with U.S. federal authorities in their criminal cases against SBF and his minions, having been shocked—shocked!—to learn that there was something rotten in the state of Denmark (or the Bahamas).
It’s also worth prefacing Friedberg’s testimony with a reminder that his legal career has occasionally involved a personal role in the commission of crimes rather than their prevention. It was for that reason that, way back in August 2021, I called Friedberg’s appointment as FTX’s compliance chief “almost comically inappropriate.” Okay, caveats over, on to the filing.
Friedberg says Miller, who FTX hired in 2021, said “it was very important for him personally to channel a lot of business to S&C as he wanted to return there as a partner” following his FTX stint.
Friedberg says he was first informed of the $8 billion “customer deficit” in FTX’s balance sheet on November 7, something Friedberg says he “had no idea of” prior to that date. (Sure, he didn’t.) Friedberg says he resigned the following day and presumably made a beeline for the nearest Department of Justice branch.
“A day or two later,” Friedberg contacted Miller to suggest that FTX International and Alameda file for bankruptcy outside the U.S., partly to keep costs down and partly because most FTX International investors resided outside the U.S. Friedberg claims Miller told him the filings would be made in the U.S. “because otherwise S&C couldn’t do the job.”
Friedberg further alleges that he told Miller that FTX.US shouldn’t file for bankruptcy until it was determined whether its assets were sufficient to meet its obligations. Miller allegedly replied that he needed to include FTX.US in the bankruptcy “because FTX.US had the cash to pay S&C its retainer.”
Friedberg also claims Miller told him that there was “over $200 million cash in Ledger X,” the futures exchange that SBF acquired in 2021 (for back-door approval of derivatives trading at FTX.US via Ledger’s existing licenses with the U.S. Commodity Futures Trading Commission).
Miller allegedly claimed he planned to send this $200 million to S&C, a move that Friedberg claims left him “horrified.” Friedberg claims that when he told Miller that this would be “stealing further funds from customers,” Miller “hung up on the phone on me and terminated the call.”
The fine print was hard to read, so I didn’t read it
Friedberg’s dearth of lawyerly knowledge was on full display during Thursday’s bankruptcy hearing, which he attended remotely via Zoom. After repeatedly trying and failing to win Judge Dorsey’s attention, Dorsey clarified that he was “intentionally” ignoring Friedberg because “he has not filed a motion, he has not joined any motion. He is simply trying to be a witness, I suppose. But witnesses are not allowed unless they’re here in person.”
Friedberg’s career is marked by a similar lack of attention to detail, and his filing contains a true whopper to burnish this reputation. Last year, when Alameda was bidding for the assets of bankrupt digital lending platform Voyager Digital, Alameda was being represented by S&C. While Friedberg expected S&C to eventually submit a bill for around $500,000, the bill that S&C ultimately delivered was for $6.5 million.
Friedberg says he expressed outrage at this sum. S&C reminded him that, as the bidding for Voyager’s assets commenced, S&C had sent Friedberg their retention letter, which Friedberg had signed. This letter included a clause that provided for “value billing,” a detail Friedberg didn’t notice because “I did not fully read the exhibit to the letter.”
Friedberg claims this act of legal malpractice was due not to his ineptitude as an attorney, but because “S&C was our prior counsel and I did not imagine that they would try to slip something in the engagement letter. I was proved to be wrong.”
All pot, no honey
Incredibly, FTX’s current CEO told the Wall Street Journal this week that FTX.US may not be permanently down for the count. John J. Ray claimed there were “stakeholders we’re working with who’ve identified what they see as a viable business.” Ray said his focus is on whatever might reunite FTX.US customers with their frozen account balances.
SBF was quick to respond on Twitter, saying he was “glad Mr. Ray is finally paying lip service to turning the exchange back on after months of squashing such efforts! I’m still waiting for him to finally admit FTX.US is solvent and give customers their money back…”
Regarding FTX.US’s alleged solvency, Ray told the WSJ that SBF’s view was a reflection of the absolute disdain for proper accounting SBF showed while he was in charge of FTX/Alameda/etc. Ray noted that SBF’s list of FTX.US’s assets included the $250 million in cash held by Ledger X, which was likely purchased with FTX customer funds.
Ray said SBF was proposing to make FTX.US customers whole by raiding funds held by Ledger X customers, despite their having played no part in the fiscal sleight of hand that got SBF into this fine mess to start with. “This is the problem. [SBF] thinks everything is one big honey pot.”
SBF a flight risk?
SBF’s movements are currently restricted to his parent’s home, but even that limited space may soon shrink to a panic room in the basement. A Thursday filing by SBF’s attorneys in his criminal court case claimed there was a “security incident” at the Bankman-Fried residence in which a “black car drove into the metal barricade set outside their home.”
The filing claims that three men—presumably former FTX customers whose money was stolen by SBF—got out of the car and told the security guard who confronted them: “You won’t be able to keep us out.” But the trio immediately got back into their car and drove off, apparently in such haste that the security guard could not read the car’s license plate.
The filing came in response to several media entities pressing the court to reveal the identities of the two ‘high net-worth’ individuals who ponied up cash to convince the government that SBF wouldn’t attempt to flee the country prior to his court date. Prosecutors know who the deep-pocketed pair are, but SBF’s attorneys are trying to keep their names under wraps.
Ironically, Friday brought reports that Elizabeth Holmes, who received an 11-year sentence last November for defrauding Theranos investors, attempted to flee the U.S. for Mexico before her sentencing. The plan to flee was thwarted when the government got wind and prosecutors said, “it is difficult to know with certainty what [she] would have done had the government not intervened.” How often are the feds checking the batteries in SBF’s ankle bracelet?
Take SBF’s money…please!
Friday also saw the prosecutors in SBF’s criminal case file papers with the U.S. District Court for the Southern District of New York detailing over $600 million of seized assets that they believe are subject to forfeiture. These include the 55 million-plus shares in Robinhood Markets that SBF recently claimed he needed to pay his legal bills, but the government believes were bought with funds stolen from FTX customers.
There are also numerous accounts held with Silvergate Bank, the former crypto-friendly bank that is struggling to stay afloat after the crypto bubble burst. Intriguingly, the DoJ’s forfeiture list includes an unspecified amount held in three accounts on Binance exchanges—one at Binance.com, two at Binance.US—controlled by SBF’s former ally Changpeng ‘CZ’ Zhao, who is expected to be facing his own federal charges any moment now.
Moonstone kicks crypto to the curb
The DoJ also wants SBF to forfeit nearly $50 million in an account at Moonstone Bank, which now plans to revert to its former identity as Farmington State Bank. On Thursday (19), Moonstone/Farmington announced it was ditching its crypto clients and reverting to its pre-crypto branding.
Farmington is “returning to its original mission as a community bank and is discontinuing its pursuit of an innovation-driven business model to develop banking services for industries such as crypto assets or hemp/cannabis.” The move was sparked by “recent events in the crypto assets industry and the resultant changing regulatory environment.”
In November, news broke that Alameda had made an $11.5 million investment in FBH Corp, the parent company of Moonstone/Farmington, in spring 2022. FBH is controlled by Jean Chalopin, who also runs the Deltec Bank & Trust in the Bahamas, which was popular with SBF’s various appendages. Deltec is also the bank of choice for iFinex, the controversial firm behind the Tether stablecoin and the Bitfinex exchange.
News of Alameda’s investment—which exceeded Farmington’s total deposit average of around $10 million—was followed by revelations that Farmington/Moonstone’s deposits had soared to $84 million. Given SBF’s penchant for subterfuge in dealing with the U.S. banking system, speculation mounted as to the purpose of Alameda’s investment.
Just weeks prior to the FTX/Alameda bankruptcies, Moonstone had partnered with blockchain tech firm Fluent Finance on a plan to launch a new “U.S.+ stablecoin.” It’s unclear what will become of these plans but, considering Moonstone’s proximity to the Tether fraud and Alameda’s status as the single-largest recipient of Tether, whatever Moonstone’s stablecoin plans were, they might not have withstood close legal scrutiny.
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