U.S. Justice Department Steps into the FTX Bankruptcy Case in Delaware

Gunnar Larson g at xny.io
Tue Nov 22 07:25:04 PST 2022


Two attorneys from the Department of Justice in Washington, D.C. have filed
an appearance with the Bankruptcy Court in Delaware that is hearing the
bankruptcy case filed by the disgraced crypto exchange, FTX, and its
related hedge fund, Alameda Research. Both are majority-owned by the
scandalized former crypto kingpin Sam Bankman-Fried. More than 100 other
global tentacles of FTX are included in the bankruptcy case. The DOJ
attorneys that made the notices of appearance are Seth Shapiro and Stanton

The notice of appearance for both attorneys references two noteworthy
statutes, 28 U.S.C. § 516 and 518, among others: 28 U.S.C. § 516 reads as

“Except as otherwise authorized by law, the conduct of litigation in which
the United States, an agency, or officer thereof is a party, or is
interested, and *securing evidence therefor, is reserved to officers of
the Department of Justice, under the direction of the Attorney General*.”
(Italics added.)

28 U.S.C. § 518, reads in part:

“When the Attorney General considers it in the interests of the United
States, *he may personally conduct and argue any case in a court of the
United States in which the United States is interested*, or he may direct
the Solicitor General or any officer of the Department of Justice to do
so.” (Italics added.)

The notices from the Department of Justice were filed yesterday. Today, the
following item has been added to the court docket on behalf of FTX:

“[SEALED] Motion to Authorize (Motion for Entry of Interim and Final Orders
(A) Authorizing the Debtors, *in their Sole Discretion*, to Provide
and Exculpation to Certain Individuals*, (B) Authorizing Certain Actions
Pursuant to Section 363 of the Bankruptcy Code, and (C) Granting Certain
Related Relief) Filed by FTX Trading Ltd.. (Attachments: # 1 Exhibit A
# 2 Exhibit B) (Landis, Adam) (Entered: 11/22/2022)” (Italics added.)

The ”debtors” are FTX and its related companies that have filed bankruptcy.
Its legal standing to, in its “sole discretion,” indemnify and exculpate
anyone for potential crimes is preposterous. And to place the details of
this absurd request under seal is a further outrage to the sensibilities of
all Americans.

Reuters has reported
Bankman-Fried moved as much as $10 billion of FTX customers’ money to his
separate hedge fund, Alameda Research, through a “backdoor” in its
software. Alameda is reported to have lost much of the money on bad
investments and efforts to prop up its FTX token (FTT), while $1 billion to
$2 billion has just “disappeared,” according to Reuters. The Financial
Times reported that FTX held just $900 million “in easily sellable assets”
against $9 billion “of liabilities the day before it collapsed into

The major law firm overseeing the FTX bankruptcy proceedings is Sullivan &
Cromwell, which has a host of conflicts because of past legal work it did
for FTX
related companies.

It is also not clear who had the authority to hire Sullivan & Cromwell for
the FTX bankruptcy case or who had the authority to hire the new FTX CEO,
John Ray III. The pleadings in the case thus far fail to indicate who it
was that hired Sullivan & Cromwell or Ray.

Yesterday,* Wall Street On Parade* sent an email to Robert Giuffra and
Scott Miller, Co-Chairs of Sullivan & Cromwell, and to Andy Dietderich –
one of the Sullivan & Cromwell lawyers who is involved in the bankruptcy
case as well as the attorney who represented FTX and Alameda in their
curious efforts to buy the assets of the bankrupt crypto firm, Voyager
Digital, a company from whom Alameda had taken hundreds of millions of
dollars in loans
We wrote as follows to Sullivan & Cromwell:

“We’re planning an article for early next week on the FTX/Alameda situation
and we’re wondering how Sullivan & Cromwell was appointed to handle the
bankruptcy process in the Delaware court.

“Our question stems from the fact that the new FTX CEO reports that the
Board of Directors of FTX didn’t meet — so it was a non-functioning Board
that wouldn’t appear to have the legitimacy to appoint a law firm to handle
the bankruptcy.

“The CEO until November 11, Sam Bankman-Fried, has been characterized in
court filings by the new FTX CEO, John Ray III, as being incompetent at
best and a fraudster at worst. So it doesn’t appear that Bankman-Fried had
legitimacy to appoint Sullivan & Cromwell.

“So, you can see our puzzlement as to whom had the authority and legitimacy
to appoint Sullivan & Cromwell.

“Our deadline is today at 10 p.m. ET.”

We received no response from anyone at Sullivan & Cromwell.

We scoured the filings in the FTX bankruptcy case to see if there was an
inkling of how a law firm that was attempting to help FTX buy up other
firms while FTX was reportedly looting customer accounts got hired for the
bankruptcy court case.

We found the following interesting tidbits from the new CEO, John Ray:

“I have over 40 years of legal and restructuring experience…Never in my
career have I seen such a complete failure of corporate controls and such a
complete absence of trustworthy financial information as occurred here.
>From compromised systems integrity and faulty regulatory oversight abroad,
to the concentration of control in the hands of a very small group of
inexperienced, unsophisticated and potentially compromised individuals,
this situation is unprecedented.”

Can a group of inexperienced and potentially compromised individuals hire
the successor CEO and the bankruptcy law firm for a global crypto firm
being investigated around the world?

Ray writes elsewhere:

“I, John J. Ray III, hereby declare under penalty of perjury as follows: 1.
I am the Chief Executive Officer of the above-captioned debtors and
debtors-in-possession (collectively, the ‘Debtors’), having accepted this
position in the early morning hours of November 11, 2022. I am
administering the interests and affairs of the Debtors from my offices in
the United States…

“In the days leading up to the Petition Date, certain of the circumstances
described in Part III below became known to a broader set of executives of
the FTX Group beyond Mr. Bankman-Fried and members of his inner circle.
Questions arose about Mr. Bankman-Fried’s leadership and the handling of
the Debtors’ complex array of assets and businesses.”

And there is this:

“As the situation became increasingly dire, Sullivan & Cromwell and Alvarez
& Marsal were engaged to provide restructuring advice and services to the

Again, no specific names of who hired them.

And this:

“At the same time, negotiations were being held between certain senior
individuals of the FTX Group and Mr. Bankman-Fried concerning the
resignation of Mr. Bankman-Fried and the commencement of these Chapter 11
Cases. Mr. Bankman-Fried consulted with numerous lawyers, including lawyers
at Paul, Weiss, Rifkind, Wharton & Garrison LLP, other legal counsel and
his father, Professor Joseph Bankman of Stanford Law School. A document
effecting a relinquishment of control was prepared and comments from Mr.
Bankman-Fried’s team incorporated. At approximately 4:30 a.m. EST on
Friday, November 11, 2022, after further consultation with his legal
counsel, Mr. Bankman-Fried ultimately agreed to resign, resulting in my
appointment as the Debtors’ CEO. I was delegated all corporate powers and
authority under applicable law, including the power to appoint independent
directors and commence these Chapter 11 Cases on an emergency basis.”

Aside from the fact that all night negotiations ending at 4:30 a.m. in the
morning are perhaps not the best way to determine the fate of a company and
its customers’ missing funds, again Ray makes the claim that he was
“delegated all corporate powers and authority under applicable law,” but
fails to state the person or persons who delegated this power to him.

As for the adequacy of Sam Bankman-Fried’s legal representation, his father
may not have been the best choice. Reuters is reporting this morning
Sam Bankman-Fried’s parents are attempting to return a deed to FTX for
luxury property in the Bahamas that was in their name. As for Paul Weiss, it
quickly dumped Sam Bankman-Fried as a client

Ray is clear on the negligence of the FTX Board of Directors, writing:
“Many of the companies in the FTX Group, especially those organized in
Antigua and the Bahamas, did not have appropriate corporate governance. I
understand that many entities, for example, never had board meetings.”

Despite the sketchiness of just how Ray became CEO and how Sullivan &
Cromwell got to wear so many hats in the FTX debacle, big bucks are flowing
to the swarms of new FTX advisors.  According to the court filings, Ray
will be paid $1300 an hour; the Directors he appointed will be paid $50,000
a month; the new Chief Administrative Officer, Chief Financial Officer, and
Chief Information Officer will be paid $975 an hour; and Ray’s employer,
Owl Hill Advisory LLC, will receive a $200,000 retainer. We’ve yet to
locate the hourly rate at which Sullivan & Cromwell will be paid, but we’ll
certainly keep an eye out for it.

If there was ever a case where the Department of Justice needs to be
actively involved, this is it.

---------- Forwarded message ---------
From: Pam Martens <alerts at wallstreetonparade.com>
Date: Tue, Nov 22, 2022, 10:02 AM
Subject: Once Daily Digest Email
To: <alerts at wallstreetonparade.com>

Wall Street On Parade has posted a new item:

U.S. Justice Department Steps into the FTX Bankruptcy Case in Delaware

By Pam Martens and Russ Martens: November 22, 2022 ~
Two attorneys from the Department of Justice in Washington, D.C. have filed
appearance with the Bankruptcy Court in Delaware that is hearing the
bankruptcy case filed by the disgraced crypto exchange, FTX, and its related
hedge fund, Alameda Research. Both are majority-owned by the scandalized
former [...]

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