FTX’s former chief regulatory office Daniel Friedberg submitted an objection to the retention of law firm Sullivan & Cromwell (S&C) in the exchange’s bankruptcy case on Jan. 19.
Friedberg also served as FTX.US’ chief compliance officer.
Friedberg alleged unethical conduct on the part of FTX US general counsel Ryne Miller. Friedberg alleged that Miller channeled business to S&C, where Miller was formerly a partner. Friedberg said in the declaration:
“Mr. Miller informed me that 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 after his stint at the Debtors.”
This “bothered” Friedberg who advised Miller to only hire the “best” outside counsel. Friedberg informed Miller that his allegiance was now to FTX US and not S&C, as per the court filing.
However, Miller engaged S&C in several legal matters concerning FTX.US, the filing said. S&C served as the primary counsel for FTX US, and FTX Derivatives, in many cases. The law firm also served as personal counsel to FTX founder Sam Bankman-Fried (SBF) and former FTX engineering chief Nishad Singh.
Friedberg added:
“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.”
The declaration further stated that S&C represented different FTX entities simultaneously, without properly waiving conflict of interest. It is important that the lawyers in the FTX bankruptcy case are “independent and not have a history of representing all of the various groups and the principals at one time,” Friedberg noted.
Furthermore, Friedberg said that when he learned of the $8 billion customer asset deficit on Nov. 7, he approached Miller. At the time, Miller was busy contacting “all the billionaires that he knew” to help SBF raise emergency funds to fill the deficit.
Friedberg said he told Miller to “review his ethical obligations” before continuing to represent FTX.US but Miller allegedly “dismissed” Friedberg’s concerns, the filing noted.
A couple of days later, Friedberg informed Miller that all FTX retained law firms have suggested that FTX International and Alameda Research should file for bankruptcy outside the U.S. However, Miller insisted that the bankruptcy cases be filed in the U.S. so that S&C could represent the firms.
Friedberg further told Miller that FTX.US should not file for bankruptcy since it had sufficient resources. However, Miller said that FTX’s U.S. business had to be part of the bankruptcy case since it “had the cash to pay S&C its retainer.”
Miller added that he was transferring $200 million from FTX Derivatives to S&C which would take care of the legal costs of the bankruptcy.
As per the declaration, Friedberg was “horrified” and tried to remind Miller that “he was stealing further funds from customers” but Miller hung up the phone.
Allegations of misconduct against Sullivan & Cromwell
According to Friedberg, a lawyer from S&C made a false statement to him and violated the New York code of ethics. The S&C lawyer in question informed Friedberg that S&C was representing all FTX entities and all assets were being combined.
Friedberg informed the S&C lawyer that there were “unwaivable conflicts.” However, the S&C lawyer said the conflict rules did not apply in the bankruptcy context — which Friedberg claims is false.
Furthermore, Friedberg alleged that S&C breached “ethical obligations” and overbilled while representing Alameda in its credit bid in the Voyager bankruptcy. S&C allegedly sent a bill of $6.5 million for its representation in the Voyager bankruptcy case. Friedberg asked Miller to fix the problem but Miller later authorized a payment of $2.5 million, the declaration noted.
Friedberg also alleged that S&C was aiding and abetting BlockFi to violate the Securities Act while acting as BlockFi’s SEC counsel. He further claimed that S&C made several false statements and breached ethical boundaries multiple times.
What happens next
The FTX bankruptcy case will be up for hearing on Jan. 20 to discuss the retention of S&C as counsel. The SEC’s former chief of the Office of Internet Enforcement John Reed Stark said:
“If the allegations set forth in the Friedberg filing are even partially true (despite Friedberg’s obvious credibility issues), I cannot imagine any circumstance where the FTX Trustee would be allowed to engage Sullivan & Cromwell for any purpose.”
Stark added that if the allegations are confirmed to be true then:
“Certain lawyers from Sullivan & Cromwell may be called in for DOJ proffers or, if appropriate, could even face civil, regulatory or criminal liability.”
Financial services lawyer James Murphy said that if Friedberg is not present at the hearing, S&C will likely move to strike the declaration as hearsay. He added that if Friedberg shows up at court, “we could see one heck of a cross-examination confrontation.”
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