Sam Bankman-Fried, BlockFi and Sullivan & Cromwell: A Viper’s Nest of Conflicts and Intrigue

Gunnar Larson g at
Mon Feb 13 07:35:02 PST 2023

By Pam Martens and Russ Martens: February 13, 2023 ~

Ryne Miller, Former Sullivan & Cromwell Partner; Now General Counsel of
Ryne Miller, Former Sullivan & Cromwell Partner, Became General Counsel of

On December 21, Big Law firm Sullivan & Cromwell filed a conflict
disclosure with the U.S. Bankruptcy Court in Delaware, where it was hoping
to be officially appointed as lead counsel for the bankruptcy estate of Sam
Bankman-Fried’s collapsed crypto house of cards – FTX, Alameda Research and
its more than 100 opaque affiliates. Judge John Dorsey signed the order
making Sullivan & Cromwell lead counsel on January 20, despite a
mind-numbing list of conflicts of interests, including extensive past legal
work for the FTX group and personal legal work for its now indicted
kingpin, Sam Bankman-Fried. The disclosure showed that in addition to FTX
and Alameda Research, Sullivan & Cromwell had 10 other current crypto
clients, including four major crypto competitors to FTX — BlockFi,
Coinbase, Gemini, and Kraken.

Damian Williams, the U.S. Attorney for the Southern District of New York,
whose office indicted Bankman-Fried on eight criminal counts for looting
billions of dollars from customer accounts, called FTX “one of the biggest
financial frauds in American history.” Those four crypto competitors that
Sullivan & Cromwell named as also being their clients, haven’t fared too
well either.

BlockFi is in bankruptcy proceedings in the U.S. Bankruptcy Court for the
District of New Jersey with over $1 billion exposure in loans and locked up
assets at Bankman-Fried’s related companies. Coinbase is a publicly-traded
crypto exchange in the U.S.; its shareholders lost 86 percent of their
money if they owned the stock throughout last year. Gemini is a crypto
exchange created by the Winklevoss twins, Cameron and Tyler. Its customers
have been locked out of their interest-bearing “Earn” accounts to the tune
of $900 million since November 16 of last year. Kraken is also a crypto
exchange; last Thursday the Securities and Exchange Commission charged it
with the “illegal unregistered offer and sale of securities involving the
staking of crypto assets.” Kraken agreed to pay $30 million in penalties
and disgorgement.

While this litany of crypto disasters does not paint a pretty picture of
what is happening in general with Sullivan & Cromwell’s crypto clients,
BlockFi is in a league of its own in terms of a viper’s nest of conflicts
inside Sullivan & Cromwell and internecine intrigue.

Under Bankruptcy Code Section 327(a), attorneys hired by the bankruptcy
estate cannot hold or represent an interest adverse to the estate and must
be “disinterested persons.” The December 21 disclosure filed with the FTX
bankruptcy court included a declaration from Sullivan & Cromwell partner,
Andrew Dietderich, who told the court the following:

“Based solely on the conflicts procedures described herein, (i) S&C is not
aware of any conflict between its representation of the Debtors and its
representations of its Current Clients or Former Clients that would cause
S&C not to be a ‘disinterested person,’ (ii) S&C does not represent any
person or entity having an interest adverse to the Debtors in connection
with these chapter 11 cases….”

On the date of that declaration, December 21, Sullivan & Cromwell was well
aware that its client, BlockFi, had an extremely adversarial relationship
with the FTX group. On the compensation request submitted by Sullivan &
Cromwell to the bankruptcy court last Wednesday, for legal work it
performed for the FTX group in the last 19 days of November, the name
BlockFi appears 57 times. In 6 of those instances, the billable hours were
described as involving the “BlockFi adversary proceeding” or “BlockFi
adversary action.” For example, on November 30, Sullivan & Cromwell law
partner, Brian Glueckstein, billed 3.2 hours for what he described as

“Analysis and strategy re: BlockFi claims (.80); call with S&C and Haynes
Boone teams re: BlockFi claims issues (.50); follow-up correspondence to
S&C team re: same (.20); meetings with A. Dietderich re: BlockFi claims
(.40); correspondences to S&C team re: BlockFi adversary proceeding (.40);
meeting with A. Dietderich and J. Bromley re: BlockFi strategy issues
(.40); meeting with M. Porpora re: BlockFi adversary proceeding (.50).”

>From November 12 through November 30 (which is the only compensation
request that Sullivan & Cromwell has presented to the FTX bankruptcy court
thus far) the law firm billed a total of 50.3 hours of work related just to
BlockFi. At its indicated “blended hourly rate” of $1,452.41, that’s more
than $73,000 involving an “adversary proceeding” when the law firm had told
the court on December 21 that “S&C does not represent any person or entity
having an interest adverse to the Debtors.” (Sullivan & Cromwell’s total
compensation request came out to more than $7.6 million for the 19-day

What is this adversary proceeding all about? BlockFi is claiming ownership
of more than half a billion dollars in publicly-traded shares of Robinhood,
a trading app, which were 90 percent-owned by Sam Bankman-Fried through an
offshore vehicle called Emergent Fidelity Technologies, Ltd. The shares
were pledged as collateral for $680 million in loans that Alameda Research
owed BlockFi.

Judge Dorsey was put on notice of this adversary proceeding on January 5 of
this year when Richard Anigian, a law partner at Haynes and Boone, LLP,
filed a declaration in Dorsey’s court explaining the situation along with
documentation that tallied up to 372 pages.

Sullivan & Cromwell has conceded in a court filing that it represented
Bankman-Fried in connection with this Robinshare share purchase. Making
that transaction even more fraught for Sullivan & Cromwell is the fact that
the Department of Justice believes that Sam Bankman-Fried may have been
attempting to hide that half billion dollars he held in the publicly-traded
common stock of Robinhood by setting up the offshore vehicle, Emergent
Fidelity Technologies Ltd. in Antigua, to hold the shares. The registration
for Emergent Fidelity Technologies, Ltd. was filed on April 22, 2022 in
Antigua. Federal prosecutors for the Southern District of New York wrote in
a letter on January 30 of this year that “the original circumstances of the
purchase of these shares, through a foreign special purpose vehicle with no
public connection to FTX or Alameda, further indicate the steps the
defendant has taken to obscure his criminal misuse of FTX customer

The documentation on how this transaction went down is a window into what
was going on under the nose of Sullivan & Cromwell’s former partner, Ryne
Miller, who became General Counsel to FTX US in August of 2021.

Although Miller was General Counsel to FTX US, not Alameda Research or
Emergent Fidelity Technologies Ltd., he listed himself as the contact
person on the Securities and Exchange Commission filing for this Robinhood
stock purchase.

Presumably, Miller should have inquired into how Bankman-Fried came by this
more than half a billion dollars to buy 56 million shares of Robinhood
stock. That’s not a pretty picture either.

Caroline Ellison, the woman who was reportedly at some point sleeping with
Sam Bankman-Fried in his penthouse in the Bahamas, that was shared with
other FTX executives, signed two loans from Alameda Research to Sam
Bankman-Fried in April and May of 2022. The loans totaled $491.7 million.
Ellison signed the promissory notes for these loans as Co-CEO of Alameda
Research. Ellison also signed the pledge agreement to BlockFi as Co-CEO of
Emergent Fidelity Technologies, Ltd. despite the fact that the Bylaws for
Emergent list officer positions of President, Treasurer, Secretary, etc.
but no such position as CEO or Co-CEO. Bankman-Fried is listed as the sole
Director of Emergent.

According to the complaint against Sam Bankman-Fried filed by the Commodity
Futures Trading Commission (CFTC), it is highly likely that the loans made
to Bankman-Fried from Alameda Research came from looted customer funds. The
CFTC writes:

“…without disclosure to FTX customers, Alameda and FTX commingled assets
and freely used FTX customer assets as if they were their own, including as
capital to deploy in their own trading and investment activities. On
information and belief, Bankman-Fried, his parents and other FTX and
Alameda employees used FTX customer assets for a variety of personal
expenditures, including luxury real estate purchases, private jets,
documented and undocumented personal loans and personal political

According to testimony provided to the House Financial Services Committee
on December 13, $8 billion of customer funds are missing at the FTX group
of companies.

One of those customers, Warren Winter, filed a written objection with the
bankruptcy court to Sullivan & Cromwell serving as lead counsel in the
bankruptcy case. Winter wrote:

“Sullivan & Cromwell was one of the FTX Group’s ‘primary external law
firms’ before the FTX Group collapsed. To date, the FTX Group has paid the
firm more than $20.5 million in fees and retainers. Now, in the most
flagrant attempt by a fox to guard a henhouse in recent memory, Sullivan &
Cromwell has applied to be appointed the FTX Group’s bankruptcy counsel
with duties that would include ‘investigating all potential estate causes
of action’….”

Unfortunately for FTX customers, Judge Dorsey appears inclined to gloss
over serious conflicts of interests involving Sullivan & Cromwell like he’s
shooing away gnats on a summer’s day. (See 18 States Send a Message to FTX
Bankruptcy Judge John Dorsey: We’re Watching You and Numerous Big Law Firms
Had Zero Ties to Sam Bankman-Fried; So Why Did John Ray Hire Two Deeply
Conflicted Law Firms?)
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