Court-appointed investigator Robert J. Cleary has released a detailed report recommending additional investigation into several aspects of the collapsed FTX Group, with a particular focus on FTX.US, its asset management practices, and its legal representation by Sullivan & Cromwell ( S&C).
Cleary’s report, filed in the U.S. Bankruptcy Court for the District of Delaware, outlines the need for three primary investigations to further clarify the circumstances surrounding the FTX Group’s demise.
Shortages
The first major recommendation concerns the deficits on FTX.US’ balance sheets. The report highlights major concerns about recurring “holes” or deficits in FTX.US’ balance sheet.
These gaps, which were particularly evident in November 2022, indicate a possible commingling of customer and company assets, indicating possible misuse of funds.
The investigator emphasized the need for a comprehensive investigation to determine the causes, frequency and resolution of these deficiencies, which could uncover further misconduct and strengthen public confidence in the bankruptcy process.
The investigator also recommended an investigation into Ledger Holdings Inc.’s pre-bankruptcy sales. (LHI) to West Realm Shires Inc., in an effort to identify potential avoidance actions against former shareholders who may still have claims against the estate.
The investigation could provide deeper insights into the transactions that led to the bankruptcy and uncover additional assets that can be recovered.
The representation of S&C
The investigator called for a targeted investigation into the role of Sullivan & Cromwell LLP (S&C), the law firm representing FTX, specifically regarding its representation of Sam Bankman-Fried during his purchase of Robinhood stock.
The investigation aims to determine whether S&C was aware of the fraudulent activities within FTX and whether there was a conflict of interest that the court should have taken into account when approving their retention as counsel.
If S&C’s representation of Samuel Bankman-Fried in his purchase of Robinhood Markets stock proves to be inappropriate or contradictory, there could be legal and financial consequences for Bankman-Fried and other individuals involved.
This may involve revisiting the transactions and possibly reversing or renegotiating the terms. It would also disqualify the law firm from further representing debtors in the bankruptcy proceedings.
S&C controversy
S&C’s broader representation of FTX has generated significant controversy. Bankman-Fried alleged that S&C pressured him to declare bankruptcy in December 2022 to earn legal fees, while former FTX CTO Daniel Friedberg alleged misconduct in January 2023.
Reports from 2023 showed that S&C charged FTX approximately $70 million over five months of bankruptcy proceedings. From April 2024According to Bloomberg, the company has charged $170 million in cumulative fees.
The case ended up in civil court February 2024when former FTX investigators filed a class action lawsuit alleging that the company aided FTX’s misconduct.