Lawyers will make hundreds of millions of dollars from the bankruptcy of cryptocurrency exchange FTX. How?
The bankruptcy case of cryptocurrency exchange FTX has been a tragedy for many investors and creditors, as some of them lost significant sums for themselves after the platform collapsed. However, the court case has become another chance to make a fortune for lawyers – the law firm in question is Sullivan & Cromwell. It could make up to hundreds of millions of dollars on the FTX case. Here’s a closer look at the situation.
We note that there have already been scandals in the FTX bankruptcy proceedings. In particular, the liquidators of the exchange, which seeks the free assets of FTX and Alameda for their further use in the recovery of damages, managed to lose millions of dollars.
The problem is that such losses could easily have been avoided. The latter arose due to the liquidators’ ignorance of the fundamentals of DeFi platforms, i.e. protocols from the decentralised finance industry. In particular, most often the minus appeared due to the sale of collateral for a particular position, which ended in liquidation and loss of funds. It is of course impossible to recover the latter because of the decentralised nature of the protocol.
Liquidations on the decentralised Aave platform from Alameda wallets
How much are the FTX lawyers earning?
With the FTX trial dragging on until at least October 2023, the firm’s lawyers have about eight months to work with. And their work certainly won’t come cheap. Sullivan & Cromwell has more than 150 people working on the FTX case, including 30 partners with stakes of more than $2,000 an hour. According to Cointelegraph’s sources, the firm’s usual representatives charge up to $1,500 an hour.
Fees for some of the firm’s lawyers per hour of work
In the court record, Sullivan & Cromwell representatives said that the fees offered by the firm are in line with market rates of other leading law firms and in fact represent a discount compared to the rates used in non-bankruptcy cases. Bankruptcy experts are indeed in high demand as many major platforms in crypto collapsed last year, including Genesis Global Trading, Celsius Network and Voyager Digital.
It is worth noting that most such collapses happened because of close ties to other cryptocurrency companies. For example, as Gemini exchange chief Cameron Winklevoss claimed, Digital Currency Group and Genesis' interaction with crypto fund Three Arrows Capital ended up with a $1.2 billion balance sheet hole that DCG chief Barry Silbert allegedly decided not to do anything about. As a result, Genesis, a subsidiary of Digital Currency Group, filed for bankruptcy.
Here we can also remember the case of BlockFi, a blockchain platform that lost money due to its interaction with the FTX crypto-exchange. Its representatives even demanded shares in Robinhood from FTX founder Sam Bankman-Fried, though this is likely to end up going nowhere.
According to Jonathan Lipson, law firms can really hit the jackpot on high-profile cases, meaning you shouldn’t be surprised by the hundreds of millions of dollars figures. New York law firm Weil Gotshal, for example, earned about $500 million in fees on the Lehman Brothers bankruptcy in 2008. Such a large expense could be justified as Sullivan & Cromwell is potentially in a position to help recover money from those affected by the FTX collapse.
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Relatives of Sam Bankman-Fried, the founder and former CEO of the exchange, could soon become active participants in the FTX lawsuit. Lawyers in the bankruptcy case insist that Sam’s inner circle should be questioned to find out whether any of them received income from FTX. To do this, separate financial statements should also be generated for each of the witnesses, Bloomberg reports.
Lawyers allege that Joseph Bankman and his wife Barbara Fried were involved in their son’s company. Joseph Bankman, a law professor at Stanford Law School, offered tax advice to FTX employees and helped recruit the company’s first lawyers. Freed allegedly founded a political action committee that received money from FTX and its top executives.
Parents of FTX founder Sam Bankman-Fried
Sam’s brother named Gabriel Bankman-Fried founded an organisation that lobbied members of the US Congress with funds from FTX and Alameda, a trading firm founded by Bankman-Fried. So far, however, neither Gabriel nor his parents have given their response to reporters’ enquiries about the case.
Judge John Dorsey must approve the lawyers’ request before they can issue subpoenas to the Bankman-Fried family to appear for questioning and produce financial statement documents. Given the dishonest business practices within FTX, it is possible that members of Sam’s family have been involved in some other financial fraud.
We believe that such spending on lawyers may indeed be justified if they can recover billions of dollars to compensate the victims of FTX's collapse. However, the earlier situation with the liquidators of the company clearly demonstrated how inexperienced representatives of such companies are in dealing with decentralised platforms. Accordingly, more problems may lie ahead.
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