FTX Bankruptcy Proceedings Thus Far Show a Shocking Miscarriage of Justice

Gunnar Larson g at xny.io
Thu Jan 12 08:51:15 PST 2023


https://wallstreetonparade.com/2023/01/ftx-bankruptcy-proceedings-thus-far-show-a-shocking-miscarriage-of-justice/


By Pam Martens and Russ Martens: January 12, 2023 ~

To grasp the severity of the miscarriage of justice that occurred yesterday
at the hands of Judge John Dorsey in the bankruptcy hearing for collapsed
crypto exchange, FTX, one first needs a brief bit of background.

The FTX companies that the bankruptcy lawyers are attempting to resuscitate
or sell off to other crypto outfits (while the law firms collect millions
of dollars in billable hours for their work) are peddling a product –
crypto – that is created out of thin air and has no legitimate productive
purpose. (See Over 1,600 of the Brightest Scientific Minds in Technology
Have Signed a Letter Calling Both Crypto and Blockchain a Sham.)

The hundreds of billions of dollars that American investors have been
dumped into crypto exchanges, crypto lenders, crypto miners, and crypto
banks are not only threatening the safety and soundness of the U.S.
financial system, they are threatening the global competitiveness of U.S.
innovation. These failing enterprises raise capital in public markets,
crowding out real companies with real innovations.

In July 2019, NYU Professor and economist Nouriel Roubini said this in a
Bloomberg News interview:

“Crypto currencies are not even currencies. They’re a joke…The price of
Bitcoin has fallen in a week by how much – 30 percent. It goes up 20
percent one day, collapses the next. It is not a means of payment, nobody,
not even this blockchain conference, accepts Bitcoin for paying for
conference fees cause you can do only five transactions per second with
Bitcoin. With the Visa system you can do 25,000 transactions per
second…Crypto’s nonsense. It’s a failure. Nobody’s using it for any
transactions. It’s trading one sh*tcoin for another sh*tcoin. That’s the
entire trading or currency in the space where’s there’s price manipulation,
spoofing, wash trading, pump and dumping, frontrunning. It’s just a big
criminal scam and nothing else.”

The law firm that Judge Dorsey is allowing to pull a coup d’etat in his
courtroom is Sullivan & Cromwell – the go-to law firm for Wall Street for
more than a century — which has bestowed on itself the role of lead law
firm in the FTX bankruptcy. For reasons that appear to rest firmly on just
two words – “billable hours” – Sullivan & Cromwell has immersed itself in
all things crypto. In a recent FTX bankruptcy court filing, Sullivan &
Cromwell acknowledged that not only has it collected legal fees and
expenses of $8,564,487.50 from FTX and its related companies over the prior
16 months, plus a $12 million retainer for bankruptcy work, but it is
simultaneously outside counsel to four of FTX’s major competitors: BlockFi,
Coinbase, Gemini, and Kracken.

The quick take on the status of those five clients of Sullivan & Cromwell
is as follows: the FTX group of companies has been described by federal
prosecutor Damian Williams as “one of the biggest financial frauds in
American history” with three of its top executives now indicted on a
combined 19 criminal counts; BlockFi is also in bankruptcy; Coinbase, a
publicly-traded crypto exchange, has lost more than 80 percent of its
market value over the past 12 months; Gemini has had more than $900 million
of client funds frozen at another crypto firm, Genesis; and Kracken has
fired 30 percent of its staff.

But instead of bringing some sunshine to this murky mess that exists
between Sullivan & Cromwell and the crypto cabal, Judge Dorsey has opted
for more darkness. FTX filed for Chapter 11 bankruptcy on November 11 – two
months ago. The U.S. Trustee, which represents the Department of Justice in
bankruptcy cases, together with major media outlets (Bloomberg News, Dow
Jones, New York Times and Financial Times), had filed motions asking the
court to release the names of the customers and creditors so that the
public and the press could have transparency in the matter.

There have been multiple academic studies showing that the vast majority of
trading on unregulated crypto exchanges is fake with an unsavory agenda of
attempting to legitimize an otherwise illegitimate enterprise. Just last
month, a paper released by the National Bureau of Economic Research found
that “wash trading volume, on average, is as high as 77.5% of the total
trading volume on unregulated exchanges, with a median of 79.1%….” The
researchers define wash trading as “investors simultaneously selling and
buying the same financial assets to create artificial activity in the
marketplace….”

Judge Dorsey releasing the names of the customers would allow the academic
community and the press to conduct an analysis into the nature of traders
that used FTX as well as its interrelationships with the megabanks and
hedge funds on Wall Street. A document filed with the bankruptcy court by
Sullivan & Cromwell has indicated that megabanks JPMorgan Chase, Bank of
America, Morgan Stanley and Wells Fargo had existing relationships with FTX
and/or its affiliated companies. Details of these relationships have yet to
find their way into the sunshine.

Attorneys for FTX argue that the customer lists have resale value and that
the customers might be poached by crypto competitors if their names are
released.

The reality is that any real FTX customers (outside of the potential bots,
algorithms and fake traders that might be doing the trading) are very angry
customers. Their accounts at FTX have been frozen for more than two months
with no ability to access their cash or securities. New FTX management has
testified that $8 billion of customers’ money is missing. And as each day
of financial distress grows among FTX customers, there is a new breaking
story about the opulent life that the alleged fraudsters were living with
the looted funds from customer accounts.

In short, it is highly unlikely that these defrauded customers are going to
beat a path to the door of another crypto exchange or remain at that crypto
firm if their account is sold and moved to another crypto firm. These are
now very hostile, out-for-revenge customers and for good reason. So, who in
their right-mind would want to pay good money for pitchfork-yielding
clients who have had a life-altering taste of crypto investing?

Where these defrauded and abused customers would likely want to run is into
the arms of a traditional, federally-insured bank. But what
federally-insured bank would want to get within 10 miles of this mess –
given the recent warning from federal regulators to consider rubbing elbows
with crypto a threat to a bank’s safety and soundness.

The attorney for the U.S. Trustee, Juliet Sarkessian, has already agreed to
accept making public just the customers’ names, without addresses or other
identifying information. But despite that concession, yesterday Judge
Dorsey yielded yet again to Sullivan & Cromwell and extended the blackout
on the names of customers and creditors for another 3 months.

Then there is the issue of such brazen conflicts of interest with Sullivan
& Cromwell that four U.S. Senators had to resort to sticking the glaring
conflicts under the nose of Judge Dorsey by releasing a public letter to
him on Monday. (The letter struck us as symbolic of an open cry for help
from fellow Americans to save a failing democracy, its court system and its
financial system.)

The bi-partisan group of Senators (Elizabeth Warren (D-MA), John
Hickenlooper (D-CO), Thom Tillis (R-NC) and Cynthia Lummis (R-WY) got to
the core of the conflicts in this paragraph:

“To name just one challenge: will the firm’s lawyers be able to effectively
investigate their current and former partners who were central in FTX’s
conduct? Additionally, given their longstanding legal work for FTX, they
may well bear a measure of responsibility for the damage wrecked on the
company’s victims. Put bluntly, the firm is simply not in a position to
uncover the information needed to ensure confidence in any investigation or
findings.”

An FTX customer, Warren Winter, was even more blunt in the objection his
attorneys filed with the Court. His assessment was as follows:

“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.’ But it has revealed almost nothing about its prepetition work
for Sam Bankman-Fried’s fraudulent enterprise — and failed to disclose or
elided glaring conflicts of interest.”

Winter goes on to reveal the following to Judge Dorsey:

“Two former Sullivan & Cromwell lawyers are General Counsel to FTX Group
entities. Sullivan & Cromwell did not disclose these connections in its
Application and therefore violated Federal Rule of Bankruptcy Procedure
2014, which requires a statement ‘all of [the firm’s] connections with the
debtor … [and the debtor’s] attorneys.’ What’s more, disclosed or not,
these connections create a conflict of interest and are disqualifying. FTX
US General Counsel Ryne Miller is a former partner at Sullivan &
Cromwell…Miller is alleged to have played a key role— perhaps the key
role—in wresting control of the FTX Group from Sam BankmanFried and
directing this extremely valuable bankruptcy matter to his former firm.
According to Bankman-Fried, and supported by what appears to be genuine
evidence, Miller proclaimed to have usurped control of the FTX Group by
November 8th. He immediately secured a $12 million retainer for his former
firm and allegedly mounted an ‘extreme pressure’ campaign to put the FTX
Group into bankruptcy with Sullivan & Cromwell and its hand-picked CEO at
the helm.

“FTX Ventures General Counsel Tim Wilson is another former Sullivan &
Cromwell lawyer. The Securities and Exchange Commission has alleged that
FTX Ventures made at least $200 million in venture-capital investments
using customer funds that had been misappropriated through Alameda
Research….”

Despite all of these startling conflicts of interest, Judge Dorsey has been
allowing Sullivan & Cromwell to run the show since the FTX bankruptcy
petition was filed on November 11. Sullivan & Cromwell has overseen the
hiring of a multitude of advisors, including investment bank Perella
Weinberg Partners, which is engaged in seeking buyers for some of the FTX
businesses.

In addition, Judge Dorsey has stalled on hearing a motion filed more than
40 days ago by the U.S. Trustee for an independent examiner to be appointed
in the case. The U.S. Trustee wrote in the motion:

“An examiner could—and should—investigate the substantial and serious
allegations of fraud, dishonesty, incompetence, misconduct, and
mismanagement by the Debtors, the circumstances surrounding the Debtors’
collapse, the apparent conversion of exchange customers’ property, and
whether colorable claims and causes of action exist to remedy losses. The
appointment of an examiner is mandatory under 11 U.S.C. § 1104(c)(2)
because the Debtors’ fixed, liquidated, unsecured debts to its customers
alone far exceed section 1104(c)(2)’s $5 million threshold.

“An examination is preferable to an internal investigation under the facts
of these cases because the findings and conclusions of the examination will
be public and transparent, which is especially important because of the
wider implications that FTX’s collapse may have for the crypto industry….”

Yesterday, Judge Dorsey cancelled the hearing on that motion that had been
scheduled for January 20 and pushed the hearing forward to February 6 at
9:30 a.m. (We would anticipate that the objection to Sullivan & Cromwell
filed by customer Warren Winter would be heard on the same date.)

This raises the obvious question as to whether all of the myriad actions
and hirings and expenditures of money that Sullivan & Cromwell has already
engaged in will have to be unraveled if the court determines that the law
firm was too conflicted to have functioned as the lead law firm on the FTX
bankruptcy.
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