The California law firm that acted as lead outside counsel for crypto exchange FTX until just before its collapse in 2022 remains under investigation in the FTX Chapter 11 bankruptcy, according to a report, opens new tab issued last week by an independent court-appointed examiner.
Fenwick & West was the only law firm “entrusted with a birds-eye view” of what was happening at FTX and its sister hedge fund Alameda Research, according to bankruptcy examiner Robert Cleary of Patterson Belknap Webb & Tyler, who was appointed earlier this year at the behest of federal bankruptcy watchdogs.
Fenwick’s legal work for FTX and Alameda, the Cleary report said, “closely intersected with core aspects of the FTX Group’s improper operations and management,” including the diversion of more than $2 billion in “founder loans” to FTX insiders as well as efforts by FTX and Alameda executives to hide the close relationship between the exchange and the hedge fund from regulators.
Fenwick said in an email statement that it has and will continue to cooperate with the ongoing investigation described in Cleary’s report.
“The examiner’s status report did not include any finding of wrongdoing on Fenwick’s part,” the law firm’s statement said. “Fenwick stands behind the integrity of the work we performed on behalf of FTX.”
Cleary’s report referred to Fenwick & West only as Law Firm-1, not by name. But because the examiner noted that lawyers Daniel Friedberg and Can Sun moved from Law Firm-1 to in-house roles at FTX and Alameda, it’s clear that Law Firm-1 is Fenwick & West, where the two attorneys previously worked.
Cleary’s primary job as examiner was to assess whether FTX’s lead bankruptcy lawyers at Sullivan & Cromwell were conflicted because of their work for the exchange in the months before its collapse. As my Reuters colleague Dietrich Knauth reported last week, the examiner concluded that Sullivan & Cromwell bankruptcy lawyers were not complicit in FTX’s fraud.
Cleary concluded that Delaware federal bankruptcy judge John Dorsey acted within his discretion when he approved Sullivan & Cromwell as lead counsel for the bankrupt exchange. The firm has earned more than $180 million in that role.
The examiner did ask Dorsey to authorize additional investigation of Sullivan & Cromwell’s representation of former FTX CEO Sam Bankman-Fried in his $500 million purchase of Robinhood shares in 2022. Federal prosecutors subsequently accused Bankman-Fried of using misappropriated customer funds to buy his Robinhood stake. (Bankman-Fried was convicted last November in a Manhattan federal jury trial.)
Sullivan & Cromwell said in an email statement that if the court approves any additional investigation of its work on the Bankman-Fried’s Robinhood deal, it will cooperate with the examiner. “Sullivan & Cromwell remains confident in our prepetition work for FTX and the commencement of the Chapter 11 cases, and we welcome the examiner’s findings to date rejecting various baseless allegations about our work for FTX,” the statement said.
In addition to recounting his own findings on Sullivan & Cromwell, Cleary disclosed investigations by FTX bankruptcy lawyers from Quinn Emanuel Urquhart & Sullivan into potential claims against scores of law firms and accountants that worked for the crypto exchange. (The examiner does not appear to have conducted an independent investigation of any of FTX’s law firms except for Sullivan & Cromwell.)
Cleary said Quinn found no evidence that most of FTX’s outside law firms were aware of misconduct by FTX insiders. But according to his report, Quinn’s extensive investigation of Fenwick & West — which included the review of nearly 185,000 documents turned over by the law firm and nearly 70,000 documents Quinn obtained from FTX’s internal database — shows Fenwick lawyers were “directly involved” in matters that allegedly helped FTX insiders misappropriate customer money and hide that misconduct.
The examiner also noted that Fenwick and FTX executives used the ephemeral messaging app Signal for many communications. Of the 144 Signal conversations disclosed by Fenwick, only 18 still show actual messages.
Cleary’s report does not specifically assert that Fenwick was aware of the insiders’ misconduct. And notably, Quinn Emanuel has not filed a complaint in the FTX bankruptcy against Fenwick, which allegedly earned more than $22 million in legal fees from FTX and Alameda between 2018 and 2022. Quinn has brought lawsuits in FTX’s Chapter 11 proceeding against such defendants as Bankman-Fried’s parents and FTX’s former chief compliance officer, a onetime Fenwick partner.
Cleary’s report includes some interesting background on FTX’s relationship with Fenwick, which was originally selected to represent the crypto exchange by Bankman-Fried’s father, Stanford Law School professor Joseph Bankman. He “maintained unusually close personal relationships” with Fenwick lawyers, the report said, “which sometimes translated into subsidizing perks for certain [Fenwick] attorneys, such as paying for travel and admittance to sporting events.”
Bankman did not immediately respond to an email query.
Both Fenwick & West and Sullivan & Cromwell have been sued by FTX customers in consolidated litigation in Miami federal court over the exchange’s collapse. Both law firms, as I’ve told you, have moved to dismiss the lawsuits, arguing that FTX customers have offered no credible evidence that they were aware of wrongdoing by Bankman-Fried and other FTX and Alameda insiders.
Lawyers cannot be liable, the firms contend, for providing routine legal services to fraudsters unless the lawyers knew of the fraud.
The allegations discussed in the examiner’s report overlap substantially with claims in the customer lawsuits. A lead lawyer in the customers’ cases, Adam Moskowitz of The Moskowitz Law Firm told me by email that Cleary’s report lends support to his lawsuits.
The examiner “specifically found Fenwick was intricately involved with all of FTX’s core functions and Sullivan specifically gave FTX instructions and advice on how to hide [Bankman-Fried’s] purchase of millions of dollars in Robinhood stock,” Moskowitz said, adding that he’s particularly gratified that Cleary wants to continue investigating Sullivan & Cromwell’s role in Bankman-Fried’s Robinhood stock purchase.
The examiner’s report has no direct impact on the customers’ case, although Fenwick & West can’t be too happy that Cleary aired details about Quinn Emanuel’s Chapter 11 investigation of the firm just as U.S. District Judge Michael Moore of Miami is weighing Fenwick’s motion to dismiss the customers’ lawsuit.
In the next few months, Fenwick should know if its FTX woes are over — or just beginning.