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Scope of Cleary’s Investigation into FTX
Do you have Unabomber prosecutor probing Sullivan & Cromwell on your 2024 FTX bingo card? pic.twitter.com/Da6ADWnvTp
— Nicholas Hall (@nicholashall) March 22, 2024
Last month, a group of FTX investors filed a class-action lawsuit against the law firm, alleging that Sullivan & Cromwell engaged in “conduct and participation” in “racketeering activity” alongside Sam Bankman-Fried’s exchange.
The investors argued that by advising FTX throughout 2021 and 2022, the firm “placed itself in a unique position to gain deep insight into the FTX entities’ convoluted organizational structure, abject lack of internal controls, and dubious business practices.”
Furthermore, the lawsuit claimed that the law firm “vouched for the solvency, safety, and security of the FTX Group up until its very collapse,” thereby misleading customers and investors.
“Despite this knowledge, S&C stood to gain financially from the FTX Group’s misconduct and so agreed, at least impliedly, to assist that unlawful conduct for its own gain,” the filing stated.
FTX Collapse Raises Conflict of Interest Concerns
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The announcement of Cleary’s appointment follows a federal appeals court decision two months prior, which ordered the reversal of Dorsey’s February 2023 ruling, citing the broader implications for the security of the cryptocurrency sector.
“The collapse of FTX caused catastrophic losses for its worldwide investors but also raised implications for the evolving and volatile cryptocurrency industry,” Judge Luis Felipe Restrepo stated. “For example, an investigation into FTX Group’s use of its own cryptocurrency tokens, FTTs, to inflate the value of FTX and Alameda Research could bring this practice under further scrutiny, thereby alerting potential investors to undisclosed credit risks in other cryptocurrency companies.”
Professors at Penn published a paper on Sullivan and Cromwell’s lies to the CFTC pic.twitter.com/Lp8qdgT4mL
— Sunil (FTX Creditor Champion) (@sunil_trades) March 21, 2024
Critics of the FTX collapse have long advocated for such an inquiry. In January 2023, Senators John Hickenlooper (D-CO), Thom Tillis (R-NC), Cynthia Lummis (R-WY), and Elizabeth Warren (D-MA) signed a letter to Judge Dorsey calling for an “objective investigation.”
“As legal counsel is often central to major financial scandals, given their role in drafting financial agreements, risk management compliance practices, and corporate controls, it is perfectly reasonable to have concerns about the impartiality and manner that Sullivan & Cromwell will approach any investigation of FTX with,” the senators wrote.
Next Steps
Meanwhile, current FTX CEO John J. Ray III has opposed the appointment of an independent examiner, arguing that the cryptocurrency company is now fully independent from the convicted fraudsters.
Cleary is expected to submit a report detailing his investigative findings on the FTX collapse within sixty days. Meanwhile, Sam Bankman-Fried is scheduled for sentencing on March 28 at Manhattan federal court.
