FTX CEO fights to keep lawyers as calls for removal intensify

January 19, 2023 Coin Telegraph

Apollo

Numerous parties have objected to the retention of Sullivan & Cromwell as lead counsel to FTX, citing conflicts of interest and insufficient disclosures.

The CEO of crypto exchange FTX has rejected calls for its law firm Sullivan & Cromwell to be replaced as lead counsel in its bankruptcy case.

John J. Ray III, who was appointed as the new FTX CEO on Nov. 11, filed a court motion on Jan. 17, arguing that Sullivan & Cromwell has been integral in taking control over the “dumpster fire” that was handed to him.

Ray suggested that retaining their services is in the best interest of FTX creditors, arguing:

“The advisors are not the villains in these cases. The villains are being pursued by the appropriate criminal authorities largely as a result of the information and support they are receiving at my direction from the Debtors’ advisors.”

The U.S. Trustee, Andrew R. Vara, had filed an objection to the retention of the law firm on Jan. 14, citing two separate issues.

He claimed that Sullivan & Cromwell had failed to sufficiently disclose its connections and prior work for FTX. He also pointed out that based on publicly-available knowledge, a former partner of the law firm became a counsel to FTX 14 months prior to the bankruptcy filing.

Meanwhile, lawyer James A. Murphy, who goes by the Twitter handle MetaLawMan, suggested on Jan. 14 that the prior work it had done for FTX was not the law firm's only conflict of interest in the case.

At the same time that Sullivan & Cromwell lawyers have had unrestricted access to all internal data about the value of FTX's assets and liabilities...

Apollo Global has (reportedly) been quietly offering to buy up creditor claims from FTX customers for pennies on the dollar.
— MetaLawMan (@MetaLawMan) January 13, 2023

He claimed that private equity firm Apollo Global has been buying up creditor claims from FTX customers for a fraction of their worth. Murphy notes that Apollo’s Chairman of the Board, Jay Clayton, is also employed by Sullivan & Cromwell, which has access to sensitive financial information.

The U.S. Trustee also believed that the current application to retain Sullivan & Cromwell was flawed, as they would “usurp” an independent examiner’s work and the parties would be duplicating their services at the expense of the FTX estate.

The Trustee had first called for the appointment of an independent examiner on Dec. 1, pointing to a part of the bankruptcy code which mandates the appointment of an examiner when certain debts exceed $5 million.

On Jan. 10, a bipartisan group of four U.S. representatives sent a letter to Delaware bankruptcy judge John Dorsey, requesting he approves the motion to hire an independent examiner and expressed their disbelief that the law firm could be labeled as a “disinterested” party.

Dorsey however labeled the letter as “inappropriate ex parte communication,” and said he would not take it into account when he decides whether to appoint an independent examiner or approve the retention of Sullivan & Cromwell.

Dorsey however is set to consider the objection of an FTX creditor filed on Jan. 10 when deciding whether Sullivan & Cromwell should be retained, with the creditor also suggesting that the law firm's previous work for FTX constitutes a conflict of interest.

Judge slams senators’ letter against FTX lawyers as ‘inappropriate’

January 12, 2023 Coin Telegraph

Coin Telegraph

Bankruptcy judge John Dorsey called the bipartisan letter “inappropriate,” and says he won’t take it into account in his decision for an independent examiner.

The judge handling FTX’s bankruptcy has reportedly slammed a joint letter from four United States senators calling for an independent examiner in the case.

As reported by Cointelegraph, the senators sent a letter on Jan. 9 highlighting concerns about the ties between FTX and Sullivan & Cromwell LLP, which as the lead law firm in the bankruptcy proceedings would be tasked with scrutinizing alleged past wrongdoing by the exchange.

However, during a Jan. 11 hearing, Judge John Dorsey of the U.S. Bankruptcy Court for the District of Delaware called the letter “inappropriate ex parte communication” thathe would not take into account in his decision.

“I will make my decisions on the matters based only upon admissible evidence and the arguments presented in open court,” he said during the hearing, according to a Law360 report on Jan. 11.

Ex parte refers to an action taken by one party in a legal proceeding without participation from the opposing party.

The letter was sent to Judge Dorsey on Jan. 9 by a bipartisan group of senators — John Hickenlooper, Thom Tillis, Elizabeth Warren and Cynthia Lummis — questioning the appointment of Sullivan & Cromwell and supporting a motion for the appointment of an independent examiner.

The motion was filed by the U.S. Trustee on Dec. 12.

In the letter, the senators noted that the law firm has previously provided FTX with legal advice and that members of the law firm had left to take positions at FTX, prompting one of the senators to suggest there could be a conflict of interest.

Get this: FTX’s legal advisors *pre-collapse* want to be appointed to oversee investigations INTO the collapse.

I’m no legal expert, but that sounds like a conflict of interest. With @SenThomTillis @SenWarren @SenLummis https://t.co/iz3k9yP1uT
— Senator John Hickenlooper (@SenatorHick) January 10, 2023

A spokesperson from Sullivan & Cromwell told Cointelegraph that the law firm met the definition of “disinterested” under the U.S. Bankruptcy Code and had “never served as primary outside counsel to any FTX entity."

The judge’s dismissal of the senators’ letter does not mean that he will reject the motion to appoint an independent examiner or approve Sullivan & Cromwell as counsel to FTX.

The judge will still need to review the objection to the Sullivan & Cromwell appointment from FTX creditor Warren Winter, whose representatives filed an amended objection on Jan. 10 claiming that the appointment could undermine the public’s faith in the bankruptcy process and the law firm itself was a “target for investigation” regarding its own “potential liability.”

Independent examiners are often appointed by bankruptcy courts to investigate details of complex cases brought before them and are able to present information to the courts from an independent point of view.

They have been appointed in other high-profile bankruptcy cases such as Lehman Brothers during the subprime mortgage crisis and the crypto exchange Celsius.

Celsius wants to extend the deadline for claims as lawyer fees mount

December 29, 2022 Coin Telegraph

BnkToTheFuture

Administrative expenses from the bankruptcy proceedings have already topped $53 million, and continued delays are chipping away at Celsius’ estate.

Bankrupt crypto lender Celsius Network is planning to file a motion that would extend the deadline for users to submit their claims by another month.

The crypto community has started to grow impatient, noting that Celsius’ lawyer fees have continued to stack up and are eating away at the lender's estate.

In a Dec. 29 tweet, Celsius announced that it would seek to extend the current deadline for claims from Jan. 3 to early February.

The bankruptcy court is set to hear the motion on Jan. 10, and according to Celsius, the Jan. 3 deadline will be extended until at least then.

Celsius is preparing to file a motion later this week requesting an extension of the bar date, which is the deadline to file a claim, from January 3, 2023, until early February.
— Celsius (@CelsiusNetwork) December 29, 2022

The claims process allows creditors who believe they have a right to payment to file claims during bankruptcy proceedings. Celsius’ creditors had made over 17,200 claims as of Dec. 29.

However, Celsius’ creditors appear antsy as Celsius’ administrative fees have continued to rack up since it first filed for bankruptcy in July. A Dec. 27 Financial Times report noted that the fees charged by bankers, lawyers and other advisers in the bankruptcy case had already reached $53 million.

As an example, a Dec. 15 fee statement from one of the law firms representing Celsius, Kirkland & Ellis, requested a fee of over $9 million for work done during the months of September and October.

In comparison, only $44 million has so far been earmarked by Celsius to be returned to customers. This money belongs to users who only ever held funds within the Custody Program, and represents a minority of the $4.72 billion of user deposits held by Celsius.

Some in the crypto community have been unimpressed with the latest postponement in the proceedings, alleging that it’s yet another “delay tactic.” For example, one user noted “Stop wasting time stop extending, just go on with proceedings and give me my money back!!!!” while another simply said: “Stop wasting time and my money.”

So the lawyers get millions but I wonder what us small fry folks get?
— Chris (@browncoat1of1) December 29, 2022

Global investment platform BnkToTheFuture founder Simon Dixon, who has been an active voice in the Celsius bankruptcy proceedings, noted in a Dec. 23 tweet that by the time users are able to get their funds back from Celsius, they should only expect around to receive around hal what they put in.

Prepare yourself for 50% in 6 months with #Celsius Chapter 11 to manage your expectations | Focus on your family over XMas & rebuilding in 2023. https://t.co/E0WeDuPem0
— Simon Dixon (@SimonDixonTwitt) December 23, 2022

At the behest of Celsius, the U.S. trustee, and the unsecured creditors’ committee, judge Martin Glenn appointed fellow judge Christopher Sontchi to be a “fee examiner” on Oct. 20. His job is to negotiate and approve the fees set by lawyers and other professionals in the case.

The fee examiner is also being paid out of Celsius’ estate, with the latest fee statement submitted on Dec. 21 requesting just under $20,000 for work done during November.

U.S. Trustee: FTX was the ‘fastest’ corporate failure in American history, calls for probe

December 2, 2022 Coin Telegraph

Coin Telegraph

The Department of Justice's U.S. Trustee overseeing FTX’s bankruptcy case has moved for the court to appoint an independent examiner.

The United States Trustee handling FTX’s bankruptcy proceedings has referred to the now-defunct exchange as the "fastest big corporate failure in American history," and is calling for an independent probe to look into its downfall.

In a Dec. 1 motion, U.S. Trustee Andrew Vara noted that over the course of eight days in November, debtors "suffered a virtually unprecedented decline in value" from a market high of $32 billion earlier in the year to a severe liquidity crisis after a "proverbial 'run on the bank.'"

"The result is what is likely the fastest big corporate failure in American history, resulting in these “free fall” bankruptcy cases."

Vara has called for an independent examination of FTX, stating it was "especially important because of the wider implications that FTX’s collapse may have for the crypto industry."

Independent examiners are typically brought into bankruptcy cases when it is in the interest of creditors, or when unsecured debts exceed $5 million.

This type of examiner has been called in other high-profile bankruptcy cases such as Lehman Brothers, and more recently to look into allegations of mismanagement by Celsius as part of its ongoing chapter 11 case.

"Like the bankruptcy cases of Lehman, Washington Mutual Bank, and New Century Financial before them, these cases are exactly the kind of cases that require the appointment of an independent fiduciary to investigate and to report on the Debtors' extraordinary collapse," the Trustee said.

Vara added that in regards to FTX’s collapse, “the questions at stake here are simply too large and too important to be left to an internal investigation.”

According to the motion, the appointment of an examiner — which requires the approval of the judge — would be in the interest of customers and other interested parties as they would be able to “investigate the substantial and serious allegations of fraud, dishonesty, incompetence, misconduct, and mismanagement” by FTX.

Additionally, the motion suggests an examiner could look into the circumstances surrounding FTX’s collapse, customers' funds being moved off the exchange, and whether entities that have lost money on FTX are able to claim back losses.

FTX’s CEO John J. Ray III, who replaced Sam Bankman-Fried on Nov. 11, has been highly critical of the firm's operations since taking control, noting on the first day in court that there was a use of “software to conceal the misuse of customer funds” and “a complete absence of trustworthy financial information,” with control concentrated “in the hands of a very small group of inexperienced, unsophisticated and potentially compromised individuals.”

While the Trustee acknowledges interested parties will be concerned that the appointment of an examiner will have costs and may intersect with FTX’s internal investigation, he suggests that these concerns don’t negate the need for an examiner.

In related news, the U.S. Attorney’s Office for the Southern District of New York and U.S. Securities and Exchange Commission have reportedly sent a number of requests to investors and firms that worked closely with FTX, asking for information on the company and its key figures.

So far, the authorities are yet to make any charges but appear to be closely investigating the defunct exchange.

Judge orders probe to investigate whether Celsius was a Ponzi

November 2, 2022 Coin Telegraph

Celsius

The Federal judge overseeing the Celsius case has asked for an investigation to look into whether the firm acted like a Ponzi scheme and has asked for additional details before approving a $3 million bonus scheme.

The judge overseeing the Celsius bankruptcy case has ordered the examiner and the official committee of Celsius creditors to determine who will head a probe into whether the firm was operating like a Ponzi scheme.

The order during the Nov. 1 hearing comes in response to allegations from customers that Celsius had used assets of new users to pay yields and facilitate withdrawals to existing users, and as a result, fits the legal definition of a Ponzi scheme.

The judge had approved the appointment of an independent examiner on Sep. 9 to look into aspects of Celsius’ business following calls for greater transparency into its operations, such as its tax payment procedures and why some customers were moved to different accounts.

It is not the first time the embattled lender has been accused of operating like a Ponzi scheme, with decentralized finance (DeFi) protocol KeyFi having alleged that Celsius acts like one when it sued Celsius on Jul. 7.

Celsius had filed for chapter 11 bankruptcy on Jul. 13, citing a crash in crypto values and poor asset deployment decisions, and the case has been proceeding through the court system since.

In the Nov. 1 hearing, the Federal judge, Martin Glenn, also told Celsius that they would have to include more details in its Oct. 11 motion to pay nearly $3 million to 62 employees as part of a key employee retention plan (KERP), with Law360 quoting the judge as saying:

“I was shocked when I saw the redactions. I had never seen anyone try to redact everything,”

Glenn is referring to a section within the motion that outlines the participants of the bonus, where every detail relating to the individuals available to the public had been redacted, including their salaries and job descriptions.

The U.S. Trustee had filed an objection on Oct. 27 to the KERP, taking issue with the lack of identifiable metrics within the motion to warrant such an expensive bonus scheme and that it prevented interested parties from arguing whether some participants could be considered insiders and therefore ineligible for a KERP.

Examiner