FTX examiner files motion to probe Sullivan & Cromwell in SBF Robinhood deal

FTX debtors are looking to take Sullivan & Cromwell (S&C), the law firm employed by FTX, to court. FTX examiner Robert J. Cleary has filed a motion to initiate a second phase of investigation into the matter.

Per a June 10 filing with the United States Bankruptcy Court, the examiner wants to investigate the role of the law firm during Sam Bankman-Fried’s (SBF) purchase of Robinhood shares.

FTX examiner to probe Sullivan & Cromwell

SBF purchased $648.3 million worth of Robinhood shares in May 2022. These shares were later seized by the US Department of Justice in January the following year.

SBF had initially requested the court to forfeit the seizure and allow him to utilize the shares to cover his legal expenses. However, the request was rejected.

The shares were later bought back by Robinhood in September of 2023.  

In the recent suit, the examiner specifically wants to focus on whether the firm knew or should have known about any misconduct or fraud within the FTX Group.

SBF had previously claimed that he was pressured into filing for bankruptcy by S&C. In his penned testimony to the U.S. House of Representatives Committee on Financial Services, he said the law firm wanted to recoup its consultancy fees.

If found guilty of misconduct, S&M could be looking at intense legal action and fines. 

Other probes into FTX

Cleary’s motion further looks to probe into the sales of Ledger Holdings, Inc. (LHI) shares. The investigation would scrutinize the terms and conditions of the sale and determine if any foul play was involved. 

The investigation would determine if any of the LHI shareholders engaged in transactions that could be subject to avoidance actions.

This legal measure aims to reverse unfairly made transactions before bankruptcy filings to benefit certain parties at the expense of other stakeholders. 

Lastly, Cleary is looking to investigate balance sheet shortfalls at FTX.US, the United States subsidy of FTX Trading Ltd. The examiner looks into the reasons behind these financial discrepancies.

The investigation would determine whether these were the result of financial mismanagement, accounting errors, or deliberate actions. 

According to the filing, the frequency of the discrepancies would clarify whether the incidents were isolated or part of a pattern. 

A key area of focus for Cleary would be whether there were any commingling of customer and corporate assets. An allegation that has been central to the FTX bankruptcy suit. 

Cleary has proposed a budget of $3 million. The investigations would take approximately ten weeks. He will also file a Phase II Report in the near future.

A hearing for the motion is scheduled for July 17, 2024, and there’s a June 24 deadline to file for objections. 

FTX and its affiliates filed for Chapter 11 bankruptcy in November 2022. At the moment, the defunct platform is looking to reimburse creditors under new management.