S&C Faces Scrutiny Over Exculpation Clause in FTX Bankruptcy Plan

Sullivan & Cromwell (S&C), the law firm managing FTX’s bankruptcy proceedings, is in the spotlight following the inclusion of an exculpation clause in the cryptocurrency exchange’s amended proposal. 

This clause is designed to protect S&C and all debtors from future liability related to the bankruptcy process has elicited concerns from creditors who fear that the firm could avoid accountability for alleged past misconduct.

Exculpation Clause Sparks Outrage Among Creditors

The exculpation clause is a provision intended to shield S&C from liability if damages occur during the bankruptcy resolution process. However, FTX creditors, including Sunil, a member of the FTX Customer Ad-Hoc Committee, expressed dismay over the provision. 

In a post on the social media platform X, he criticized S&C for seeking immunity from accountability despite purportedly selling FTX assets at steep discounts to their clients and insiders. Furthermore, Sunil highlighted dissatisfaction with the plan’s perceived failure to revive the exchange and protect creditor interests effectively.

The exculpatory clause has also stirred backlash due to a previous lawsuit brought against the firm by FTX’s top creditors. The lawsuit, filed in February 2024, alleged that S&C played a direct role in facilitating the “FTX Group’s multibillion-dollar fraud” and financially benefited from the scheme. Creditors contended that S&C was aware of fraudulent conduct at FTX and chose to aid in unlawful activities to further its interests. The firm had allegedly served as external counsel for FTX in several transactions, including the acquisition of LedgerX, for which it received considerable fees.

Potential Rejection of FTX’s Amended Plan

The inclusion of the exculpation clause in the amended proposal has prompted many creditors to express their intention to reject the plan altogether. Rob, an FTX creditor and Paradex’s head of growth, noted on X that the clause was unacceptable and urged others to vote against it. 

Additionally, creditors have criticized the compensation structure, arguing that the estimated payout does not reflect the appreciated value of assets like Bitcoin since FTX’s collapse. BitGo CEO Mike Belshe echoed this sentiment, pointing out that creditors receiving payments based on a Bitcoin valuation of $16,800 would not be adequately compensated.

S&C’s reported involvement with FTX over the years and the firm’s compensation have further fueled creditor frustration. Court filings from December 2023 indicated that FTX owed S&C up to $1.45 billion in legal bankruptcy fees. 

Despite FTX’s promise to provide “billions in compensation” to creditors under the amended proposal, the plan’s financial terms and protections for the law firm have stoked doubts over the proposed resolution’s fairness and effectiveness.