Jan 18, 2023 - Economy & Business

The objection seeking to turn FTX's "world upside down"

Illustration of a cup of pens with a gavel sticking out

Illustration: Sarah Grillo/Axios

There's a fresh FTX conflict — one about its bankruptcy lawyers Sullivan & Cromwell and whether the firm's legal guidance of the crypto exchange prior to its unwinding could pose a potential conflict of interest.

Why it matters: FTX's accounting shenanigans conjures up comparisons to Enron, which ended up in a battle with its own lawyers. The large, prestigious Houston law firm Vinson & Elkins drew scrutiny for its role in Enron's collapse, for not blowing the whistle, and ended up settling with the energy company.

  • It has become the subject matter for case studies in lawyer conduct. Though, it was Enron's auditors that were ultimately convicted.

Driving the news: The U.S. trustee, appointed by the Department of Justice, filed an objection to FTX's notice of retaining S&C as its bankruptcy advisor.

  • The intrigue: A group of unsecured creditors (among those who are owed money from FTX), aren't taking issue with S&C, joining FTX and its new CEO John Ray III, court documents filed yesterday show.

What's happening: To FTX it doesn't matter that S&C gave legal advice to FTX before it fell apart, because — per FTX's new CEO — the "dumpster fire" was created by its former CEO and founder Sam Bankman-Fried.

Yes, but: It matters to the U.S. trustee and two named individual creditors, because:

  • The U.S. trustee alleges that S&C didn't fully disclose its relationship with the crypto exchange as bankruptcy code requires.
  • The U.S. trustee also wants to make sure that an independent examiner, upon appointment, can conduct its own investigation without running into others', including FTX's and its advisers.
  • The two customers of FTX.com and FTX US, represented by Houston-based Hoda Law Firm, in their objection claim S&C's "[pre-bankruptcy] connections to the FTX Group are legion."

Zoom in: What the U.S. trustee is saying: "S&C’s disclosures as filed are wholly insufficient to evaluate whether S&C satisfies the Bankruptcy Code’s conflict-free and disinterestedness standards."

What FTX is saying: Objections to FTX's retaining S&C as legal counsel "seek to turn the world upside down," FTX said in its own filing in support.

  • What CEO Ray is saying: "The advisors working at my direction have worked tirelessly and nonstop for the last seventy days to take control over what can only be described as a “dumpster fire” in order to stop assets from being depleted," Ray said in court filings.
  • In the event that FTX were denied or limited from S&C's counsel, as well as other selected advisers, he warned, creditors, customers, federal regulators and prosecutors would be "be severely, if not irreparably harmed," he warned.

A group of unsecured creditors said they do not share the U.S. trustee's concerns and are not objecting.

Of note: A court filing shows that the U.S. trustee also set a deadline to object to its motion ordering the appointment of an independent examiner with a hearing date set for Feb. 6.

  • What we're watching: The very next hearing scheduled for the 20th.
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