Judge in FTX bankruptcy case rejects motion to remove elite NYC lawyers

(CNN) — One of America’s elite white-collar law firms has emerged as a contentious figure in the complex FTX saga.

A judge ruled that the bankrupt crypto platform could retain Sullivan & Cromwell as legal counsel, overruling objections from FTX customers who accused the firm of conflicts of interest. g

Delaware bankruptcy Judge John Dorsey dismissed an emergency motion to delay proceedings, saying on Thursday there is “no evidence of any actual conflict here.”

The lawyers for two FTX customers had filed the motion, alleging Sullivan & Cromwell hadn’t been transparent in its disclosures about money it had earned from the now-bankrupt platform. Then FTX’s former top lawyer supported the motion in a court filing, which included additional allegations that one of his former colleagues improperly funneled FTX business to Sullivan & Cromwell.

But Dorsey ruled that “a potential conflict is not per se disqualifying.”

In fact, Dorsey said, in any large bankruptcy case “it would be almost impossible” for the debtors’ counsel to have no overlapping business. The presence of lawyers from other firms ameliorates any potential conflict on Sullivan & Cromwell’s part as those lawyers can step in if needed, he said.

Former customers’ objections

Sullivan & Cromwell did disclose last month that prior to FTX’s collapse, it had earned about $8.5 million from the crypto company for legal work since 2021.

Still, a lawyer for the objectors — FTX customers who collectively lost access to $400,000 when the platform collapsed in November — cited “grave concerns” about the law firm’s “lack of transparency in its mandatory disclosures and its ability to lead an objective investigation into the FTX Group’s pre-petition activities.”

In a separate filing to the court Thursday night, FTX’s former top lawyer Daniel Friedberg sought to back the customers’ motion — while also lobbing allegations of inappropriate conduct by a former colleague at FTX who had previously been a partner at Sullivan & Cromwell. Friedberg alleged that that lawyer funneled business to Sullivan & Cromwell, hoping to curry favor with the firm to which he hoped to eventually return.

Dorsey dismissed Friedberg’s declaration: “Frankly, it’s, it’s full of hearsay, innuendo, speculation, rumors,” he said. “It’s certainly not something I would allow to be introduced into evidence in any event.”

The US Trustee, which represents the Department of Justice in court, dropped its own objection to the firm’s retention on Friday in light of additional disclosures that were filed clarifying potential conflicts.

A lawyer for Sullivan & Cromwell told the court that “the disclosure that we have filed, in my experience, is the most fulsome disclosure that I have ever seen any debtor’s counsel make… We have gone down to extraordinarily levels of detail.”

A representative for Sullivan & Cromwell declined to comment beyond what was said in court Friday.

Earlier this month, a group of US senators also raised objections to Sullivan & Cromwell’s participation in the FTX bankruptcy. In a letter to the judge, Senators John Hickenlooper, Thom Tillis, Elizabeth Warren and Cynthia Lummis urged him to appoint an independent examiner to oversee the investigation into FTX’s collapse, citing apparent conflicts of interest.

“The law firm of Sullivan & Cromwell advised FTX for years leading up to its collapse and one of its partners even served as FTX’s general counsel,” they wrote. “As legal counsel is often central to major financial scandals…it is perfectly reasonable to have concerns about the impartiality and manner that Sullivan & Cromwell will approach any investigation of FTX with.”

FTX’s founder Sam Bankman-Fried, who has pleaded not guilty to multiple counts of fraud and conspiracy charges related to his crypto empire, similarly has sought to raise suspicion around the firm’s involvement.

He wrote on January 12 that “S&C was one of FTX International’s two primary law firms prior to bankruptcy.” He described the firm as one of the “primary parties” that was “strong-arming” him to step down as CEO of FTX. Bankman-Fried resigned as CEO at the same time the company filed for bankruptcy. He was replaced by a restructuring specialist, John J. Ray III, who is overseeing the company’s bankruptcy.