The court-appointed examiner, Robert J. Cleary, has issued an extensive report suggesting 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, presented to the US Bankruptcy Court for the District of Delaware, highlights the necessity of three primary inquiries to shed more light on the circumstances surrounding FTX Group’s demise.

Balance Sheet Shortfalls

The first key recommendation revolves around balance sheet discrepancies at FTX.US. The report expresses significant concerns regarding recurring deficiencies or gaps in FTX.US’s balance sheet, particularly noticeable in November 2022. These discrepancies hint at possible mingling of customer and corporate funds, suggesting potential misuse of assets. Cleary stresses the importance of a thorough investigation to ascertain the causes, frequency, and resolution of these shortfalls, which could unveil further misconduct and enhance public trust in the bankruptcy proceedings.

Pre-Bankruptcy Sale of Ledger Holdings Inc. (LHI)

The examiner also suggests an investigation into the pre-bankruptcy sale of Ledger Holdings Inc. (LHI) to West Realm Shires Inc., aiming to identify potential avoidance actions against former shareholders who might still hold claims against the estate. This inquiry could provide deeper insights into the transactions leading up to the bankruptcy and reveal additional assets for recovery.

Sullivan & Cromwell’s Representation

Cleary calls for a focused examination of Sullivan & Cromwell LLP (S&C), the law firm representing FTX, particularly regarding its representation of Sam Bankman-Fried during his acquisition of Robinhood shares. The investigation seeks to determine whether S&C was aware of any fraudulent activities within FTX and whether there were any conflicts of interest that the court should have considered when approving their retention as counsel. Improper or conflicted representation by S&C during Bankman-Fried's acquisition of Robinhood Markets shares could have legal and financial ramifications for Bankman-Fried and other involved parties. This could entail revisiting the transactions and potentially altering or renegotiating terms, as well as disqualifying the law firm from further representation in the bankruptcy proceedings.

Sullivan & Cromwell Controversy

S&C's broader representation of FTX has sparked significant controversy, with Bankman-Fried alleging pressure into bankruptcy in December 2022 to facilitate legal fees, and former FTX CTO Daniel Friedberg alleging misconduct in January 2023. Reports in 2023 indicated that S&C billed FTX approximately $70 million over five months of bankruptcy proceedings. As of April 2024, the firm has charged $170 million in cumulative fees, according to Bloomberg. The matter entered civil courts in February 2024, as former FTX investigators filed a class action suit alleging the firm aided FTX’s wrongdoing.