FTX Bankruptcy Judge to Rule Today on an Independent Examiner – After 76 Days of Delay

Gunnar Larson g at xny.io
Wed Feb 15 07:12:25 PST 2023


By Pam Martens and Russ Martens: February 15, 2023 ~

John T. Dorsey (2016 Photo from Internet Archives' Wayback Machine)
John T. Dorsey (2016 Photo from Internet Archives’ Wayback Machine)

Judge John Dorsey is the presiding judge in the U.S. Bankruptcy Court in
Delaware where Sam Bankman-Fried’s collapsed crypto exchange, FTX, filed
its Chapter 11 bankruptcy petition. The U.S. Trustee, who provides
oversight on behalf of the U.S. Department of Justice in bankruptcy cases,
filed a motion on December 1 of last year requesting the appointment of an
independent examiner in the FTX bankruptcy case, reminding the court that
the appointment is mandatory under bankruptcy law if requested by the U.S.
Trustee and debts exceed $5 million. Today marks the 76th day that this
critical issue has been pending before this court.

The Big Law firm, Sullivan & Cromwell, for whom Judge Dorsey signed an
order making it lead counsel in the FTX bankruptcy case, despite a mountain
of conflicts of interest, has argued aggressively against the appointment
of the independent examiner. Both sides argued their positions at a hearing
on February 6. Instead of ruling from the bench on the issue as was
expected at the hearing, Judge Dorsey called attorneys for both sides into
his chambers and stated that he was taking a recess. But instead of a
recess, the hearing was adjourned. Reports later indicated that Judge
Dorsey had asked the lawyers on both sides to see if they could come to an
agreement, which would have negated his need to issue a bench ruling.

Damian Williams, U.S. Attorney for the Southern District of New York and
the federal prosecutor in charge of the criminal case against Sam
Bankman-Fried, has called FTX “one of the biggest financial frauds in
American history.” Testimony to the House Financial Services Committee by
John Ray, the new CEO of FTX, acknowledged that $8 billion of customer
funds are missing.

It might not look too good for a Judge to rule against the appointment of
an independent examiner in such a massive fraud case while allowing a
viper’s nest of conflicts to swirl around the lead counsel. In addition, 18
states have sided with the U.S. Trustee on the need for an independent
examiner in this case.

Yesterday, an amended agenda was published for an FTX hearing that will
take place this morning in Judge Dorsey’s courtroom on various other
matters. The final item on that agenda indicates that the judge “will issue
a bench ruling” at this hearing on the U.S. Trustee’s request for an
independent examiner.

There was something quite odd about the amended agenda, however. Instead of
listing all of the related documents pertaining to the U.S. Trustee’s
request for an independent examiner, as the agenda has done on other
matters, it listed only the initial request dated December 1. It did not
list the docket entries for the objections; for the support from various
state attorneys general and state securities regulators; and it failed to
list the February 1 “Omnibus Reply” by the U.S. Trustee which went to
excruciating lengths to parse the statutory language of the relevant
bankruptcy law to make clear that the appointment of an independent
examiner is “mandatory” in this case. The U.S. Trustee further noted the

“…the majority of courts that have addressed the issue in published
opinions—including the only court of appeals decision and all of the
district court decisions—have ruled that the appointment of an examiner is
mandatory under section 1104(c)(2).”

In the U.S. Trustee’s initial request on December 1, the following was also
pointed out:

“An investigation by an examiner into the alleged conversion by the FTX
Trading arm of the Debtors of $10 billion of customers’ property to lend to
its affiliate Alameda [Sam Bankman-Fried’s hedge fund], in violation of the
express provisions in FTX’s customer contracts, and into the use of
software to conceal such misuse is unquestionably in the interests of the
Debtors’ creditors and other interests of the estates. The many instances
of what Mr. Ray describes as a ‘complete failure of corporate controls and
[] a complete absence of trustworthy financial information as occurred
here’ (Ray ¶ 5), such as those detailed in paragraph 30 of this Motion,
also warrant examination.

“An appointment of an examiner would also be in the interests of the
Debtors’ creditors and other parties in interest in the Debtors’ estates,
consistent with Code section 1104(c)(1), because there is an actual
conflict of interest between Debtors FTX Trading Ltd. and Alameda Research.
FTX Trading has a claim against Alameda Research in the billions of dollars
on behalf of its customers in connection with one or more loans of
allegedly converted customer funds that FTX Trading had no right to make in
the first instance. Such an immense, out-of-the-ordinary course claim of
one Debtor against another, especially one that involves the alleged
conversion of customer funds, calls out for independent scrutiny by an
independent examiner.”

Sullivan & Cromwell is serving as lead counsel in the bankruptcy proceeding
for the FTX “Group,” which includes FTX, Alameda Research, and more than
100 opaque affiliates, many of which were registered offshore.

In a 2022 Voyager Digital deal, Sullivan & Cromwell was simultaneously
representing Alameda Research and FTX, prior to the FTX bankruptcy filing.
Further raising eyebrows in legal circles, an email has now surfaced in the
Voyager bankruptcy case, written by Sullivan & Cromwell partner, Andrew
Dietderich, (who is also active in the FTX bankruptcy case) where he tells
lawyers on the other side of the Voyager deal that “FTX is rock solid.”
That email came just four days before FTX filed bankruptcy.

And as we detailed on Monday, Sullivan & Cromwell’s conflicts in the
BlockFi matter are also beyond the pale. (See Sam Bankman-Fried, BlockFi
and Sullivan & Cromwell: A Viper’s Nest of Conflicts and Intrigue.)

Sullivan & Cromwell is also finding it difficult to finesse its way around
how to deal with the fact that its former law partner, Ryne Miller, became
General Counsel at FTX US in August of 2021. According to recent documents
filed by John Ray, Miller remains on salary at the FTX Group. And,
according to the recent detailed compensation request filed with the
bankruptcy court by Sullivan & Cromwell for $7.6 million in legal fees for
the 19-day span from November 12 through November 30 of last year, various
current law partners at Sullivan & Cromwell were including Miller in their
phone calls regarding the FTX bankruptcy case.

Against that backdrop comes a docket entry yesterday indicating that Gary
Wang, the indicted co-founder of FTX who has pleaded guilty, has been
subpoenaed to appear at the Manhattan law offices of Sullivan & Cromwell
tomorrow at 9:00 a.m. and to produce various documents. One document
request asks for “All documents concerning payment by any entity within the
FTX Group for any goods or services for the use or benefit of you or any of
the following individuals.” One of the persons on the 17-person list is
(wait for it) Ryne Miller.

Needless to say, there is much legal interest in how Judge Dorsey rules
today on the issue of an independent examiner.
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