⚖️ LEGAL BATTLE

Sullivan's Complicity

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.

‍💸 BANKRUPTCY

Broke Bar

The California State Bar is broke. As in, it's projected to end 2024 with $3.3 million in reserves. That may sound like a lot, but the organization's budget for the year is projected to near $4 million. This is all to say, the California Bar has a major problem.

So what's the solution? As Bar exam tutor Sean Silverman writes on X, the organization may be changing how it administers its entrance test:

"In an effort to save itself, [the State Bar of California] has proposed (the proposal still needs to be accepted) that it discontinue all relationship with the NCBE [National Conference of Bar Examiners]. …the crux is that when you administer an NCBE test, you're bound by terms that the state bar would prefer to not be bound by. Especially the term preventing it from allowing for at-home testing, because at-home testing will allow it to save lots of money (and possibly eliminate its deficit)."

That "save lots of money" bit is the key. As Above The Law writes, the potential savings from the changes could help keep between $2.8 million and $4.2 million in the California Bar's coffers annually.

As Above The Law points out, the Cal State Bar tried at-home tests already during the pandemic, and the results were not great: "the state simply gave up on responding to support requests from examinees and after the fact decided to just blindly accept that one-third of the examinees were cheating and the whole thing turned out to breach state procurement procedures."

Well, maybe some lessons were learned?

According to Reuters, the transition to the new exam could come as early as February 2025, and an "aggressive" timeline for getting there has been laid out by the organization. Yet, more than a dozen deans from accredited law schools in the state have raised concern over this timeline, adding that "'cost consideration alone' was not a compelling justification 'to rush toward a hasty, risky, and poorly planned' test implementation."

Internal Corruption

Of course, the California Bar hasn't been run with the cleanest reputation over the last few years. A March 2021 internal audit laid out a very cozy relationship between disbarred lawyer Thomas Girardi and the organization. A 2016 external audit by the state of California uncovered what the LA Times referred to as a history of "shady finances and bloated salaries." One such claim against the Bar detailed by the 2016 audit shows how the organization altered records to cover up complaints against lawyers. Moreover, the organization delayed payments to clients swindled by licensed attorneys.

The Verdict

The matters of internal corruption aside, the California Bar's plan to go remote with its entrance exam could be a major shift for the test. If things go well enough in the coming years, many more states could follow suit.