FTX confirms hack but not legal counsel

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

FTX said it had recovered more than $5 billion in crypto, cash and liquid securities in a report to creditors. However, it said significant shortfalls remained on both its international and US exchanges. Some of these shortfalls have been attributed to hacks, including $323 million from international exchanges and $90 million from US exchanges.

Of the $5 billion in recovered assets, it includes $300 million in liquid securities, $1.7 billion in cash and $3.5 billion in liquid cryptocurrency. These crypto assets included $685 million in Solana, $529 million in FTX tokens and $268 million in bitcoin.

sbf disagrees

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

Bankman-Fried described the financial picture painted by the report prepared by the company’s lawyers at Sullivan & Cromwell (S&C) as “highly misleading”. In a recent court filing, the firm’s attorneys discouraged Bankman-Fried from involving itself in the company’s bankruptcy proceedings. Bankman-Fried believes that the firm’s attorneys forced her to file for bankruptcy and abandon the company.

FTX bid for S&C

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

US Trustee Andrew Vara argued that the S&C’s disclosures about its past FTX operations were insufficient to determine whether conflicts could affect its representation. He also said that the S&C had not disclosed that FTX’s US general counsel Rain Miller was a partner in the firm.

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

However, S&C has claimed that it never acted as primary outside advisor to FTX, describing their relationship as “limited and largely transactional” prior to bankruptcy. Previously, S&C collected $8.5 million from FTX for advice on the “acquisition transaction and specific regulatory inquiries”.

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

Implications of Congress

Meanwhile, as FTX grapples with these issues, several newly elected members of Congress are at loggerheads with donations they allegedly received wrongly. A recent report detailed that more than a third of the 535 senators and representatives in the US Congress received campaign support from FTX.

FTX ranges from legislator tenures to newly minted recipients of donations from Bankman-Fried or other senior officials. Several 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 Republican Kevin McCarthy, the new Speaker of the House, and Democrat Chuck Schumer, the Senate Majority Leader.

So far, 19 recipients have announced they will return the donation, while others have donated money to charity. For example, Rep. Lou Correa (D-Calif.) said he intended to donate $2,995 from the FTX amount to his alma mater California State University, “to support his dream education fund.” Others have also spoken to the US Department of Justice about setting aside money to provide compensation for FTX victims.