SBF’s Defense, Part II: Why SBF Thinks Sullivan & Cromwell Sold Him Out
SBF came and went. But FTX still has its law firm: Sullivan & Cromwell
By: Zack Abrams, Zack Guzman
August 17, 2023
In the government's case against Sam Bankman-Fried, prosecutors are alleging he and three co-conspirators worked together to defraud FTX customers out of billions.
But according to exclusive defense documents provided to Coinage by SBF before he was thrown in jail, he may be preparing to argue at trial that a fourth conspirator played an even larger role in FTX’s collapse than he did — and is even continuing to draw down customer funds now.
It’s a lofty claim, and no doubt one that will be heavily scrutinized from all sides in the courtroom, but it’s also not without support – even from 18 state regulators and a bipartisan group of senators, who wrote, “given their longstanding legal work for FTX, they may well bear a measure of responsibility for the damage wrecked on the company’s victims.”
The alleged conspirator? Lawyers from the FTX bankruptcy estate’s hand-picked law firm: Sullivan & Cromwell.
Did Sullivan & Cromwell play both sides?
Sullivan & Cromwell (‘SullCrom’ or ‘S&C’) is currently acting as primary counsel in the FTX bankruptcy case, an incredibly lucrative contract for the law firm, which reported nearly $1.7 billion in revenue in 2022, according to Law.com.
In fact, in SullCrom’s most recent filing, the firm recorded more than $114 million in fees so far — and that’s just for the firm’s work from November 2022 through May 31, 2023. In total, 48 SullCrom partners have contributed to the case; if you include paralegals, associates, and analysts, nearly 200 SullCrom staff members have billed the FTX estate so far. Extrapolating that work out over an expected two-year process could very well lead to a nearly $800 million haul.
Yet SullCrom had also worked with FTX before the collapse as well, billing FTX about $8.5 million for work on matters related to the exchange since 2021. SBF even claims he used to sometimes work out of SullCrom’s offices when he was visiting New York City.
Since the collapse, SullCrom has downplayed the firm’s relationship with FTX. One of the firm’s top lawyers, Andrew Dietderich, who just days before FTX halted customer withdrawals called the exchange “rock solid,” has argued in a filing that the firm never considered FTX a regular client. A closer look at the facts reveals several allegations of impropriety have been leveled against the firm. (Disclosure: Alameda Ventures is an investor in Coinage’s production company Trustless Media. Alameda Ventures is included in FTX’s bankruptcy estate.)
SBF, in the exclusive documents provided to Coinage, claims that SullCrom submitted a report to the Commodities Futures Trading Commission that gave Alameda’s trading accounts on FTX International a “clean bill of health” sometime in 2022. SBF speculates that SullCrom worried it might have liability in FTX’s ensuing liquidity crisis, which occurred mere months later.
Dietderich, in his filing, states that SullCrom assisted FTX in “responding to information requests from the [CFTC] regarding the availability of FTX Trading’s cryptocurrency exchange to persons in the United States and Know Your Customer policies and procedures.” A FOIA request Coinage sent to the CFTC to obtain this document was denied; the agency said it was unable to share documents that “could interfere with the conduct of federal agency law enforcement activities.”
Legal experts have also raised questions about SullCrom’s work representing SBF in purchasing nearly $500 million worth of Robinhood. SBF used an offshore vehicle registered in Antigua in order to hold the shares, in a possible attempt to obscure the connection between the shell company and FTX. At the time, SullCrom was also representing Robinhood.
Dietderich admits in his filing, “S&C advised Mr. Sam Bankman-Fried in connection with Hart-Scott-Rodino compliance and public reporting obligations arising out of a position that had been established in the stock of Robinhood Markets, Inc.” The Justice Department has since seized the stock.
So amidst these apparent conflicts of interest, how did SullCrom become FTX’s now primary counsel? According to SBF, through the machinations of Ryne Miller, who was a partner at S&C for eight years before joining FTX.
Who is Ryne Miller loyal to?
Miller’s title was officially General Counsel of FTX US, but according to an affidavit by FTX’s top lawyer, Daniel Friedberg, Miller helped out with FTX International and Alameda Research, too. “Mr. Miller’s salary was paid by FTX.US and Alameda, but services were also performed by Mr. Miller for FTX International in addition to FTX.US and Alameda,” wrote Friedberg. That distinction may seem irrelevant, but given that employees working on the FTX US side have mostly been insulated from investigations thus far, it does open the same questions we raised in Part I of our investigation: Who knew what and when?
Miller had come to FTX from SullCrom and, according to Friedberg’s affidavit, planned to return to the firm eventually: “Mr. Miller often reminisced that his mentors at S&C were partners Andrew G. Dietderich and Mitchell Eitel, and that he would do anything to help those partners, and looked forward to returning as a partner to S&C after his stint at the Debtors.”
Miller’s favor towards SullCrom reportedly affected his work at FTX. SullCrom first represented FTX in placing a bid on bankrupt crypto firm Voyager’s assets in July 2022. Dietderich admits in his filing, “On the Voyager matter, S&C replaced the Latham law firm as the prior counsel on the file after an introduction by Ryne Miller, an S&C alumnus who was the General Counsel of FTX US.”
Friedberg claims he expected SullCrom’s work on the Voyager matter to cost FTX around $500,000. (“This sounds like a shocking fee but this would be normal for S&C,” his affidavit says.) Yet, Friedberg claims SullCrom billed FTX a much larger sum: $6.5 million.
When Friedberg, outraged, reportedly told Ryne Miller to fix it lest Friedberg involve SBF, Friedberg says Miller promised him he would fix the matter. Yet, Friedberg claims he later learned that Miller authorized a payment of $2.5 million to SullCrom for their work on the Voyager matter. Friedberg, in his affidavit, claimed this overbilling was “unethical” and urged the Debtors to recoup the payments. He also voiced his expectation that FTX would take retaliatory measures, writing “I expect S&C to take adverse action against me and disparage me publicly.”
In June, FTX sued Friedberg in civil court and alleged that he enabled SBF’s crimes. Friedberg has yet to face criminal charges.
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SullCrom and the Collapse
Then, SBF alleges, Miller’s golden opportunity arrived. According to the outline of SBF’s defense that he shared with Coinage, as well as with Friedberg’s affidavit, following the crisis at FTX in November 2022, Miller allegedly worked to ensure that Sullivan & Cromwell would be chosen as the FTX Debtors’ legal counsel.
SBF has always maintained that FTX US was solvent and didn’t experience contagion from the liquidity crisis that affected the international platform. So why did FTX US file for bankruptcy as well?
Friedberg alleges that Miller “stated that he needed to include FTX.US as part of the bankruptcy because FTX.US had the cash to pay S&C its retainer. Without this retainer from FTX.US, S&C wouldn’t file.”
Finally, Friedberg claims Miller told him “that there was over $200 million cash in LedgerX [an FTX subsidiary] and that he was going to send these funds to S&C, and that bankruptcy legal costs were therefore not a problem.” When Friedberg objected, Miller hung up the phone, according to Friedberg’s affidavit.
SBF claims that he signed his companies over under pressure, after receiving numerous and repeated calls and messages from Miller and SullCrom associates. He claims he changed his mind 10 minutes later, but that it was too late to undo what was done. (Dietderich's court filing disputes this, claiming Bankman-Fried signed his companies over after consulting with personal legal advisors and his own father, Stanford Law professor Joseph Bankman.)
SBF further alleged that SullCrom reneged on several promises made to SBF, including that he’d get a say in choosing a new board chair. When Bankman-Fried relented and passed the reins to their preferred candidate John J. Ray III, according to SBF, he selected FTX's primary counsel within hours. Ray chose Sullivan & Cromwell.
For once, SBF has some support…
SBF isn’t the only one who has alleged impropriety on the part of Sullivan & Cromwell. The U.S. Trustee, the division of the Justice Department that oversees the administration of bankruptcy cases, motioned in December 2022 for the appointment of an Independent Examiner in the case which would not be beholden to Ray. The Trustee argued in its filing that the appointment of an Independent Examiner would be legally mandatory in the case, since the U.S. Trustee requested one and the bankruptcy concerned a sum greater than $5 million. (The FTX case concerns a much greater sum, of course.)
A bipartisan group of four senators, including crypto-skeptic Democratic Senator Elizabeth Warren and crypto-friendly Republican Senator Cynthia Lummis, sent a letter to the judge in the FTX bankruptcy case, Judge John Dorsey, supporting the U.S. Trustee’s motion. They were later joined by state regulators from a bipartisan group of regulators from 18 states including Texas, California, and Florida.
Yet, Dorsey denied the motion, claiming it would be too expensive. Many legal skeptics have found this argument unconvincing, especially in the face of SullCrom’s high fees. (Dietderich, the SullCrom lawyer who called FTX “rock solid,” was compensated nearly $350k for his work in June alone, according to SullCrom’s latest fee filing.) An appeal is making its way through the courts.
The victims of FTX’s collapse, meanwhile, have mixed feelings when it comes to SullCrom’s work. For them, every cent of recovered funds brings them closer to replacing what they’ve lost. Travis Kling, who lost his crypto investment fund, Ikigai Asset Management, in FTX’s collapse, tells Coinage that the estimates for how many cents on the dollar customers may be able to recover have increased greatly since the bankruptcy process began. “These guys [SullCrom] are charging a shitload of money for that, but they have taken us from $0.06 to $0.40,” Kling said.
That said, Kling and others have taken issue with some of the decisions Ray has made in liquidating the FTX stake. In March, the FTX estate sought permission to sell its stake in blockchain company Mysten Labs, which it had secured for $101 million. The sale yielded only $96 million — a negative return. In May, when Mysten Labs’ token Sui began trading, FTX’s investment would have been worth nearly $1 billion. Had the estate timed its sale better, it could’ve walked away with a 10x return.
“I think you can make a really good argument that these guys are not the right guys to be to be liquidating this portfolio," Kling said. "They don't understand the timing of this stuff.”
Mr. Purple, a pseudonymous crypto investor who also lost money in FTX’s collapse, for his part, gave the current team steering the FTX bankruptcy process a failing grade.
“If I’m going to judge Sullivan & Cromwell and John J. Ray from my purview of being someone who’s seen these things in bankruptcy, I would give them a very low grade,” he said. “Because you can say, ‘Oh, this is crypto, it’s difficult,’ but it’s not that difficult, right? It was an operating company.”
…But will it matter in the criminal trial?
After ruling to detain Sam ahead of his trial, Judge Kaplan will soon have another critical ruling before him. The prosecution and SBF’s defense teams are currently filing back and forth motions on what they intend to include in regards to what led up to FTX’s bankruptcy at trial.
On August 15, SBF’s lawyers filed a motion arguing that FTX’s bankruptcy should be excluded. “There is a significant risk…that the jury will improperly infer that the bankruptcy itself is proof that FTX and Alameda collapsed because of fraud, as opposed to outside market forces,” the lawyers wrote.
However, should the bankruptcy be discussed, the lawyers argued, it would “force the defense to rebut these inferences by delving into the reasons for the bankruptcy, including the motives of FTX’s senior management (assisted by counsel) in forcing Mr. Bankman-Fried to hand over control of FTX to Mr. Ray and pushing the company into bankruptcy, as well as the FTX Debtor Entities’ mismanagement of estate assets.”
Coinage asked former Bernie Madoff prosecutor Marc Litt for his expert opinion. As he simplifies it, SBF’s defense is attempting to play offense by making mention of all the legal dealings and advice he received from Miller and others.
“It’s as if they are saying, ‘Here’s Pandora’s box. You don’t want to open the box,’” Litt said, noting that it could present an opportunity for the defense to throw more at jurors. “If they can keep out the negative of the bankruptcy, they give up exploring these detours.”
Regarding SBF’s allegations against SullCrom and Miller (who is not referenced by name) the Justice Department prosecutors, in their own filing, argued that their behavior will not be under question in the upcoming trial. “None of these parties are on trial, and whether they have done a good or bad job with the Chapter 11 proceeding, or suffered from a conflict of interest, is not relevant to the defendant’s guilt. Even if there were any evidence that FTX US’s general counsel was improperly motivated in pushing for a Chapter 11 filing, such evidence would not be probative of his truthfulness, and therefore would also not be [be] a proper basis for impeachment.”
Until Judge Kaplan rules on what may or may not be admissible at trial, it’s unclear whether or not SBF will be able to use the bankruptcy proceeding, or any legal counsel in the handlings that may have led to it, to mount an effective defense. But SBF’s relationship with Miller has already had one significant impact on his criminal case. When SBF was sent back to prison, the Judge’s reasoning was that there was probable cause to believe SBF tampered with two witnesses. The first was Caroline Ellison, as SBF leaked her private diaries to the New York Times.
The second, however, was Miller. On January 15, 2023, SBF reportedly wrote an email and a Signal message to Miller, writing in part, “I would really love to reconnect and see if there’s a way for us to have a constructive relationship, use each other as resources when possible, or at least vet things with each other.” We were unable to reach Miller for comment on this story. Sullivan & Cromwell did not respond to repeated requests for comment.
While prosecutors are in contact with Ryne Miller, it’s unclear whether or not he will be called to testify at SBF’s trial. While the alleged misconduct of SullCrom may not be discussed at the trial, its shadow is sure to hang over the proceedings. SBF’s trial is scheduled to begin October 2, 2023.
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Disclosure: Alameda Ventures is one investor among many in Trustless Media, the production company behind Coinage. Sullivan & Cromwell is now also legal counsel for Alameda Ventures via the FTX Bankruptcy Estate.
