FTX Affirms Hack but not Legal Counsel

FTX reported losing $415 million in crypto through hacks, as it struggles to affirm its chosen legal counsel.

FTX said it had recovered over $5 billion in crypto, cash and liquid securities, in a report to creditors. However, it said that significant shortfalls remained at both its international and U.S. exchanges. Some of these shortfalls it attributed to hacks, including $323 million from the international exchange and $90 million from its U.S. exchange.

Of the $5 billion in recovered assets, it comprised $300 million in liquid securities, $1.7 billion in cash and $3.5 billion in liquid cryptocurrency. These crypto assets consisted of $685 million in Solana, $529 million in FTX’s token and $268 million in Bitcoin. 

SBF Disagrees

However, FTX founder Sam Bankman-Fried said he disagreed with the calculations presented in the new leadership’s report. He believes that the company should have more than enough to repay U.S. customers. According to his “best guess,” the company owes its U.S.-based customers between $181 million and $497 million. Notably, Bankman-Fried has not had access to FTX records since his resignation as CEO in Nov.

Bankman-Fried described the financial picture painted by the report, as prepared by the company’s lawyers at Sullivan & Cromwell (S&C), as “extremely misleading.” In a recent court filing, attorneys at the firm discouraged Bankman-Fried from involving himself in the company’s bankruptcy proceedings. Bankman-Fried begrudgingly believes lawyers at the firm forced him into filing for bankruptcy and relinquishing the company.

FTX bid for S&C

However, S&C’s previous work for FTX may now jeopardize its potential to represent the exchange during its bankruptcy proceedings. A representative of the Justice Department’s bankruptcy watchdog objected to FTX’s bid for a bankruptcy judge’s approval to hire S&C.

U.S. Trustee Andrew Vara argued S&C’s disclosures about its past FTX work were insufficient to determine if conflicts could affect its representation. He also said that S&C had not disclosed that FTX’s U.S. general counsel, Ryne Miller, had been a partner at the firm.

Vara also said that if the firms were allowed to investigate the collapse of FTX, it “would necessarily focus on those with connections to S&C – and possibly on S&C itself.”

However, S&C claims to never have served as primary outside counsel to FTX, describing its relationship before the bankruptcy as “limited and largely transactional.” Prior to that, S&C had collected $8.5 million from FTX for advising on “acquisition transactions and specific regulatory inquiries.”

The firm argued in its counsel application that it meets FTX’s need for sophisticated counsel across a range of areas. Law firms that secure these types of bankruptcy cases can earn hundreds of millions of dollars in legal fees.

Congressional Implications

Meanwhile, as FTX struggles with these issues, many newly elected members of Congress reckon with allegedly ill-gotten donations. A recent report detailed that more than one-third of the 535 senators and representatives in the U.S. Congress received campaign support from FTX.

Legislators that received donations from Bankman-Fried or other senior executives at FTX range from the tenured to the newly minted. Many of the 196 recipients of the crypto exchange’s political donations were sworn in earlier this month. They also include members of both political parties, including the new Speaker of the House Republican Kevin McCarthy and Senate Majority Leader Democrat Chuck Schumer.

So far, 19 recipients have declared that they would return the donations, while others have donated the funds to charities. For example, Rep. Lou Correa (D-Calif.) said he intended to donate the $2,995 he received from FTX amount “to support their Dreamer education fund,” at his alma mater California State University. Others have also spoken with the U.S. Department of Justice about setting aside the money to provide compensation for FTX victims.