S&C's Bankruptcy Legal Team Exonerated in Latest FTX Proposal

A contentious clause emerged following a lawsuit by top FTX creditors against Sullivan & Cromwell, alleging their involvement in FTX Group's fraud.

May 8, 2024 - 13:11
S&C's Bankruptcy Legal Team Exonerated in Latest FTX Proposal
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FTX's revised proposal includes a clause that could absolve Sullivan & Cromwell and all debtors from potential future liabilities. This amendment was met with dissatisfaction from creditors, particularly regarding Sullivan & Cromwell's role. The updated repayment plan, unveiled on May 7, introduces an exculpatory provision. Such a clause is designed to protect certain parties from liability in case of damages incurred during the bankruptcy process.

Within the FTX context, the inclusion of this clause by Sullivan & Cromwell is speculated to be a measure to protect themselves from potential legal repercussions. Sunil, a prominent member of the FTX Customer Ad-Hoc Committee representing over 1,500 creditors, voiced concerns about this clause in a recent post dated May 8:

"S&C included an exculpation clause so they can not be held liable for misconduct — selling FTX assets at 70% to 90% discounts to their own clients and insiders (Ledger X, Galaxy), not restarting FTX 2.0, etc if we accept the plan."

This contentious clause emerged following a lawsuit by top FTX creditors against Sullivan & Cromwell nearly three months earlier. The lawsuit alleged that Sullivan & Cromwell played an active role in FTX Group's alleged multibillion-dollar fraud, benefiting financially from these illicit activities. A court filing on Feb. 16 stated:

"S&C knew of FTX US and FTX Trading Ltd.’s omissions, untruthful and fraudulent conduct, and misappropriation of Class Members’ funds. 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."

Sullivan & Cromwell, a longstanding law firm overseeing FTX's bankruptcy proceedings, has a history of providing legal counsel to the exchange in various transactions, including its attempts to acquire Voyager Digital's assets and its purchase of LedgerX. Compensation filings from December 2023 indicated that FTX owed Sullivan & Cromwell up to $1.45 billion in legal fees related to the bankruptcy case.

Could FTX's revised proposal face rejection?

FTX's latest plan has stirred widespread discontent among cryptocurrency investors, largely due to the inclusion of an exculpatory clause. This clause might lead creditors, including pseudonymous FTX creditor Rob, who also serves as the head of growth at Paradex, to vote against it. In a post on May 8, Rob expressed his dissatisfaction, stating:

"Icing on the cake from the team that destroyed billions of potential value for FTX customers. This can't be allowed. I'm voting NO on this plan."

According to Mike Belshe, the CEO of BitGo, none of the FTX creditors are satisfied with this compensation arrangement. In a post on May 8, Belshe remarked:

"0% of FTX creditors agree that receiving $16800 for your bitcoin is fully compensated. I understand why the bankruptcy process needs to work this way but let's not pretend victims are getting their money back or that FTX wasn't as awful as it was."

While FTX debtors have pledged to offer over 98% of creditors an 11% payout, in addition to "billions in compensation" for the remainder, some argue that this isn't fair. They point out that debtors are compensating holders based on a $16,800 Bitcoin (BTC) price, which has seen significant appreciation since the collapse.