The FTX saga is not over just because Sam Bankman-Fried is getting locked away. Sullivan & Cromwell, the Big Law firm that represented the embattled crypto-exchange is now fending off claims by FTX's investors that the law firm was complicit in fraud.
“Plaintiffs in this action, a handful of alleged FTX customers, purport to bring claims against Sullivan & Cromwell to recover the same damages for which they are already being compensated through the bankruptcy process,” the firm told a Florida judge in an attempt to have the case dismissed, reports Bloomberg Law.
The lawsuit alleges that Sullivan knew FTX was in trouble but sought to profit regardless. As Reuters notes, the firm racked up $180 million in fees from the case, equaling about 10% of its total 2022 revenue. Furthermore, "some FTX creditors and U.S. lawmakers had unsuccessfully opposed Sullivan & Cromwell's bid to serve as bankruptcy counsel, arguing that the firm's ties to FTX and past work for the company created conflicts of interest. FTX's former U.S. general counsel, Ryne Miller, was a former partner at Sullivan & Cromwell."
But Sullivan's own representation in the case, lawyers from Hunton Andrews Kurth, told the US District Court for the Southern District of Florida that “lawful legal services to a fraudster does not impute knowledge of the fraud.” In other words, just because we've worked with FTX now and in the past, doesn't mean we knew they were committing fraud.
“A lawyer is obligated to provide the beneficiary of the work with undivided loyalty and disinterested advice,” Michael Frisch, Georgetown Law ethics counsel, told Bloomberg. “Did the lawyer have some interest either disclosed or not that impairs the ability to provide that disinterested advice? That is really the overarching question.”
The class action suit against Sullivan was brought by The Moskowitz Law Firm and is the second such case against a former FTX counsel. Fenwick & West, which was the crypto-exchange's main counsel, is also facing a suit along with Sequoia Capital, Thoma Bravo, and Paradigm.
The Fall of CZ
Running parallel to the collapse and trial of FTX, was that of fellow crypto mega-exchange Binance. It's founder and head, Changpeng "CZ" Zhao, faced two case—one for his and Binance's violation of the Bank Secrecy Act, and a second for the "alleged mishandling of customer assets and the operation of an illegal, unregistered exchange in the U.S.," says CNBC. Late last month, CZ entered a plea deal in the case involving the violations of the Bank Secrecy Act and was sentenced to 4 months in prison.
The Verdict
While the titans of crypto may have fallen, the currencies themselves have seen a strong resurgence in value over the past few months. Crypto winter may be ending, but lessons are still being learned from this new sector's first major cycle.
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