Examiner finds Sullivan & Cromwell didn't ignore 'red flags' that would've tipped them off to FTX's misconduct

Law firm Sullivan & Cromwell LLP. did not ignore "red flags" about crypto exchange FTX when it was advising its CEO Sam Bankman-Fried on buying Robinhood shares before their downfalls, according to an examiner's latest report.

In Examiner Robert Cleary's first published report in May, he recommended a probe into Sullivan & Cromwell's "representation of Bankman-Fried in connection with his purchase of shares of Robinhood Markets, Inc." Sullivan & Cromwell now advises FTX on its bankruptcy proceedings, which has been ongoing since 2022.

Robinhood shares were held by Emergent Fidelity Technologies Ltd., which was controlled by Bankman-Fried, and Sullivan & Cromwell gave legal resources, Cleary said. In May 2022, Bankman-Fried bought over 7% of Robinhood's stock, which was worth about $648 million at the time, according to multiple news reports.

Then, later in 2022, FTX collapsed alongside its sister trading firm Alameda Research, and multiple parties , including FTX, Bankman-Fried and BlockFi, asserted claims to the shares.

Cleary said Sullivan & Cromwell did not ignore "red flags" that would have tipped them off to FTX's misconduct or that they had a "disqualifying conflict" when advising Bankman-Fried when he bought the Robinhood shares," in his examiner's report filed on Wednesday.

Bankruptcy Judge John Dorsey appointed Cleary, who prosecuted the Unabomber case in the late 1990s, as examiner after an appeals court ruled in January that FTX had to be investigated by an independent examiner.

'Sam trading question'

In April 2022, FTX.US General Counsel Ryne Miller emailed partners at Sullivan & Cromwell asking questions about the “hypothetical” acquisition of a large position in a publicly traded entity, with the subject line being “Sam trading question," according to the report.

"In the Examiner’s witness interviews, S&C attorneys said they did not find it unusual that Miller—an FTX Group employee—contacted S&C in connection with Bankman-Fried’s personal investments," the examiner said in the report. "This is because they knew that the FTX Group was largely owned by Bankman-Fried, and that it is common for wealthy individuals to rely on their corporate employees in this manner."

The FTX lawyers said a Form 13D would have to be filed, which is a filing for a person that acquires more than 5% of a voting class of a company's shares.

Miller said Bankman-Fried did not mind being named in the 13D filing, but did not want Alameda named.

"... the S&C attorneys were not suspicious of Bankman-Fried’s reluctance to disclose Alameda because confidentiality is often of paramount importance to wealthy individual clients for completely legitimate reasons," the examiner said. "Based on his investigation as well as his own professional experience, the Examiner finds this explanation credible and does not believe S&C ignored a red flag by not inquiring further."