Full Disclosure:

What is going on with Sam Bankman-Fried/FTX?

By Jaysen Sutton
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The Story:
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A US judge sentenced Sam Bankman-Fried to 25 years in prison. The sentencing follows Sam’s conviction of seven charges, including fraud and conspiracy to commit fraud.

What you need to know for your interviews:

If I wanted to buy some bitcoin in 2021, I might have gone to FTX. It’s an exchange that allows you or me to buy cryptocurrencies, as well as carry out more complex crypto trades, like buying options or futures.

During that time, FTX became popular very quickly. It had support from big institutions, a Super Bowl ad, and endorsements from celebrities. At a time when bitcoin was booming, FTX was positioned as the ‘safe’ alternative in a murky crypto industry.

And behind FTX was Sam Bankman-Fried. An effective altruist, Sam promised to give away billions to charity.

The legal issues explained:

The sentencing follows Sam’s conviction of seven charges, including wire fraud and conspiracy to commit wire fraud, which is what I’ll focus on here.

When customers deposited money into FTX, under Sam’s direction, that money was used for other purposes - like funding his other trading firm, Alameda Research, contributions to political campaigns, and paying back lenders.

Sam did this knowingly (a key part in establishing fraud). Little did FTX customers know, they were depositing their money into accounts under Alameda, rather than FTX, and he had a backdoor system that basically allowed Alameda to withdraw customer funds from FTX. All of this was despite representations to FTX customers that FTX and Alameda were separate.

This became a huge problem when the website Coindesk publicly shared Alameda’s balance sheet in 2022. The balance sheet showed that Alameda had a lot of 'FTT' on its balance sheet, a digital currency from FTX.
This was weird. If they were two separate companies, why was Alameda's solvency dependent on this token, something that was hard to value and sell? The news led to the CEO of Binance, a competitor of FTX, to sell its holdings of FTT. This triggered a typical bank run as customers raced to withdraw customer deposits.

Only remember that Sam had used these customer deposits to finance other things. So FTX didn’t have enough money to meet customer withdrawals. Despite Sam’s public assurances, in a matter of days, FTX filed for insolvency.

Ultimately, Sam falsely promised FTX customers that their money was kept separate and their interests were protected. He was accused of knowingly building systems to use customer deposits for other purposes without being detected and misleading customers, banks and investors regarding the relationship between FTX and Alameda.

What does this mean for law firms?

What is the role of a law firm when a cryptocurrency exchange like FTX goes bust? How does it balance its role to the company who pays its fees, against the broader interests of third parties who stand to lose millions?

Between November 2022 and early 2024, Sullivan & Cromwell had billed FTX more than $180m, amounting to 10% of the firm's total revenue in all of 2022. (Paralegals at the firm billed up to $595 per hour with partners billing up to $2165 per hour!)

But the law firm has been under heavy scrutiny for its role over the company’s downfall, particularly given its subsequent appointment in the FTX bankruptcy. Investors allege that FTX ‘could not have achieved fraud of such tremendous scale’ without Sullivan & Cromwell’s resources, expertise, and connections. They argue that the nature of its relationship with FTX prior to its bankruptcy, advising on M&A, regulatory compliance, and lobbying, led the law firm to participate in FTX’s fraud.

Meanwhile Fenwick & West is also being sued for allegedly helping to enable FTX’s fraud. Fenwick & West was represented by Gibson Dunn.



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