The court-appointed examiner, Robert J. Cleary, has issued a detailed report recommending further investigations into various aspects of the collapsed FTX Group, with a particular focus on FTX.US, its asset management practices, and its legal representation by Sullivan & Cromwell (S&C).

Cleary’s report, submitted to the US Bankruptcy Court for the District of Delaware, outlines the necessity of three primary investigations to clarify the circumstances surrounding FTX Group’s collapse.

Regarding FTX.US, the report highlights concerns about recurring balance sheet shortfalls observed in November 2022, suggesting potential commingling of customer and corporate assets, which could indicate misuse of funds. Cleary emphasizes the need for a thorough investigation to uncover the causes, frequency, and resolution of these shortfalls, aiming to uncover any additional misconduct and restore public confidence in the bankruptcy process.

Additionally, Cleary recommends investigating the pre-bankruptcy sale of Ledger Holdings Inc. (LHI) to West Realm Shires Inc., aiming to identify potential avoidance actions against former shareholders with claims against the estate. This inquiry could provide deeper insights into transactions preceding the bankruptcy and potentially recover additional assets.

Concerning Sullivan & Cromwell LLP (S&C), Cleary calls for a focused inquiry into the firm’s role in representing FTX, particularly in relation to its representation of Sam Bankman-Fried during his acquisition of Robinhood shares. The investigation seeks to determine whether S&C was aware of fraudulent activities within FTX and whether there were conflicts of interest that should have been disclosed when their retention as counsel was approved.

If improper or conflicted representation by S&C is found, it could have legal and financial ramifications for Bankman-Fried and other parties involved, potentially requiring a reassessment of transactions and disqualification of S&C from further debtor representation in the bankruptcy proceedings.

S&C’s broader representation of FTX has sparked controversy, including allegations that the firm pressured Bankman-Fried into bankruptcy to generate legal fees. Former FTX CTO Daniel Friedberg also alleged misconduct. Reports indicate S&C billed approximately $70 million during five months of bankruptcy proceedings and accrued $170 million in fees by April 2024, according to Bloomberg. This controversy escalated into civil court actions in February 2024, with former FTX investigators filing a class action suit alleging S&C facilitated FTX’s misconduct.