Push Kim. Hey everyone, it's Michael Lewis here and this is judging Sam. For the past few months, we've been covering the story of Sam Bankman Freed. He's the founder of the cryptocurrency exchange FTX. It was worth billions of dollars before it came a part at the scenes. I wrote a book about all this and Sam called Going Infinite and reported on his trial here on the podcast. He was found guilty of fraud and conspiracy in his
sentencing a schedule for later this week. Meanwhile, FTX has been going through bankruptcy proceedings, and in a surprising twist, ftx's lawyers recently announced that all the creditors will likely be paid in full. All the FDx customers who couldn't get their money out when FTX collapsed will probably get their money back. But my guest today argues that the bankruptcy process has been handled badly. His name is Jonathan Lipson.
He's a bankruptcy expert at Temple University and he co wrote a research paper about the FTX bankruptcy that will be published next year in the Stanford Law Review. So Sam bachmcfreed has been tried, convicted, and is going to jail, and everybody's been paying attention to that, and that is seems to be the human drama. But there's this whole other legal process, the bankruptcy process, that's getting very little attention, and that you have written about. Why is it important?
It's important for a number of reasons. You know, it is important because we're concerned about how the bankruptcy was run for the benefit of you know, creditors and investors and so on. There are millions of people who have lost money in this company, and if it was handled properly, perhaps they would do better. Number Two, it appears that the bankruptcy process itself and the company itself were you know,
in effect accelerating and perhaps distorting the criminal prosecution. And you know, like that's a really serious problem because we have certain legitimate expectations about how prosecutors do their job, and for that matter, we have certain basic expectations about how lawyers are supposed to act.
So let's back up. Can you just tell me what caught your eye in the first place. Let's start there, like what caught your fry.
A lot of my work involves bankruptcy. I researched it, I write about it, teach it, and really I had no particular interest in crypto at all. I was interested in FTX only because it was the kind of a bankruptcy where you would have expected to see something that I had studied in the past, an examiner. The idea being that when Congress created the Bankruptcy Code, they said, in some cases, you really need somebody from the outside to come in and conduct an investigation of what happened
and write a report about it for the public. In FTX, the the United States Trustee has sought an examiner at the beginning of the bankruptcy case, and to my surprise, and I think the surprised that some folks, the bankruptcy judge said no. And we can talk more about why it was surprising, but the short answer was that when the US Trustee sought to appeal that decision to the Third Circuit, I agreed to write an amikus brief in support of the US Trustee, basically seeking to have an
examiner appointed. We won in the Third Circuit, and you know, as you probably know your listeners probably know, an examiner has been appointed in the case. As of a couple of days ago.
I doubt our listeners do know because it's also our kane, and it's been striking to me how little attention the bankruptcy has gotten compared to the rest of the case. So act, let's go in a little more detail. Why would you have expected in this case for there to be an examiner? And actually backup, backup even further than that, just explain what the checks are on the bankruptcy process generally, like how we did this with your co author, David's.
But let's deal a little refresher, Like a company goes into bankruptcy, then what happens.
So you know, to take a step back, bankruptcy in the US is for companies like FTX that are purporting to reorganize. The basic intuition that Congress had in the nineteen seventies was, well, we shouldn't just kill the company and sell off the assets to pay the creditors if we could avoid it, because if we can keep the company going, then everybody's probably going to be better off.
We'll save jobs, the company will make more money because it'll be profitable, maybe if it returns to profitability, and you know, it's just just much better than what used to happen, which was a liquidation. But Congress realized that, you know, if you allow the company to stay in business even when it's in bankruptcy, then maybe the guys who got the company into trouble are still running the roost,
and maybe that's not so great. So they said, look in large cases, in cases where we have any concerns about what happened before bankruptcy, an examiner should be appointed. Should be mandatory, right, the statute says an examiner shall be a I did in a certain class of cases. And the reason I got involved in all this in part is because you know, I did a study on these guys many years ago, because everybody sort of knew it didn't really happen the way Congress expected.
How how did it not happen the way Congress expected? What was different?
What was different is that, you know, while debtors and creditors fight all the time about all sorts of things, there is one thing they agree on, and that is that they hate examiners.
Huh.
They don't want somebody coming in from the outside poking around in their negotiations because basically, a Chapter eleven bankruptcy is just a protracted negotiation in the shadow of a court with some procedural rules that are designed to facilitate
that negotiation. Right, So an examiner is a problem for that, right, because the examiner is coming in from the outside, maybe you know, asking questions of management that management doesn't necessarily want to answer, maybe, you know, interfering with or distracting from the negotiations that are happening, and certainly costing money. Right. The examiner doesn't work for free. The government doesn't pay
the examiner. The examiner is paid really ultimately by creditors, right, in the same way that all of the folks who run the bankruptcy are ultimately paid by creditors.
Right.
So, you know, if you think about it, kind of intuitively, the folks on the ground who run these cases are lawyers who see each other all the time in different cases, and you know, they fight sometimes and they get along sometimes. But what they don't want as an outsider, like for example, Bob Cleary, the prosecutor's now been appointed to be the examiner in FTX, coming in from the outside and saying, actually, let's do a little forensics here and see what actually happened.
And so even though Congress said, oh, well, you know, we should have these, you know, examiners routinely, as you know, a way of serving the public interest in understanding what happened, Like nobody ever asks for them, and you know frequently judges say, yeah, we know the statute requires it, but you know, when in those rare cases they're asked, they've often said no. But the one exception that we found in our research was, well, look, when there's a massive
free fall case like Enron or Lehman Brothers or World Commra any of these, you know, then you know, all the inside guys are like, well, right, we get it, like you do need somebody to come in and explain what the hell happened. And so in FTX, you're like, well, that certainly looks like that, right, it looks like Lehman
and Ron or something. So that's why I was surprising that you didn't see an examiner appointed in FTX, although you know, the explanation that was given at the time was, well, you know, Bankment Freed had given up control of the company to a guy named John Ray, who I'm sure we'll talk about, who clearly was independent of Bankman Freed and who was a bankruptcy expert. He'd done a lot
of work in a lot of cases. And so if you think that, you know, an examiner is just going to be independent of prior management, you know, Ray is
that guy. I think the bigger problem than certainly the one that we focus on in the paper that we've just released, is the law firm of Sullivan and Cromwell, who had been company counsel for certain purposes before bankruptcy, brought Ray in and you know, as far as we can tell, had a very specific set of interests in seeing how the bankruptcy was going to proceed, and so maybe they weren't quite as independent in a in a in a problematic way from Bankman Freed as you would have thought.
My understanding, and this is from interviewing John Ray, is that Sullivan and Cromwell, who had been Sam Bankman Fried's lawyers before the bankruptcy in Good Times, had found John Ray to come in and take over from Sam Bankman Freed. And then the minute Sam Bankminfreed signs the documents handing the company to John Ray, he hires Sullivan and Cromwell to run the bankruptcy. And that's going to be worth hundreds of millions of dollars to Sullivan and Cromwell. Is that right?
That's I think that's I think that's mostly correct. I mean, I think that you know, the the kind of the three different versions of the story about this law firm, Sullivan, Cromwell, and just to be clear, like we are not out to get Cromwell, were not out to fight the verdict, like we just want to understand what happened here. But you know, there's a little bit of detail on all this.
But you know, Solomon Cromwell was clearly doing important work for FTX before bankruptcy, and it was mostly work involving the acquisition of other companies like ledger X and other subsidiaries, and even more importantly representing FTX in dealings with regulators, in particular the CFTC, the Commodity Futures Trading Commission, which was super important for FTX because they wanted to, you know,
establish some kind of regulatory legitimacy for crypto. And it was really important for Solivon Cromwell because they're one of the premier firms at interacting with regulators. Many of the folks at the firm were former regulators themselves, and you know, they're an extremely well regarded firm precisely because they do that stuff really well. And you know, I think that the short version of the story is that Solomon Cromwell didn't probably know about the underlying problems at FTX until
November eighth of twenty twenty two. But they were telling the world that everything was fine. They were implying that actually they did know everything they needed to know to say to the CFTC and to creditors and contract counterparts.
FTX is rock solid, in the words of one of the Solovon Cromol lawyers, and I think probably on November eighth or around then, they woke up to the fact that things were not rock solid, that there was a problem because the company was commingling assets, even though Sam had promised everybody that would never happen.
What is com mingling.
It simply means that that FTX and Bankment Free had promised depositors that their crypto would be held by FTX, it would be on the FTX exchange and nobody else would have it. But that turned out to be false for some very important number of depositors because it ended up at a related company known as Alameda, and that was you know, a big problem because Alameda used the money for all these other purposes that obviously depositors didn't expect.
And so, you know, I don't know that the most sort of the you know, nefarious version of the story of Solomon Promwell is true, namely that they you know, they got John ready to come in and steal the company from bankman free. I think that's improbable, if only because Suli Cromwell has tons of money already, Like they don't really need hundreds of millions of dollars because they
already have hundreds of millions of dollars. I do, however, think they might have panicked, and I think in that moment of panic did several things that we'd describe in our paper that I think at minimum were ethically problematic and from our perspective, more importantly problematic, from the bankruptcy perspective, from the process, the perspective of the goals of the bankruptcy process.
And they're all going that are going on behind closed doors because there's no examiner to reveal all this. Describe those things that you think Sulimon Crumwell did that are problematic.
Sure, So I think the first thing that happens is you know, on November eighth, Tourney named Andy Dieterrik, who's an important person in the story as a bankruptcy lawyer, I think, realizes, you know, because he gets at a panic call from some lower level attorneys at FTX that there's commingling going on that there's a real problem that the company is having a liquidity crisis because they can't
honor withdrawals. We don't know what happens internally at S and C, but we do know that the very next day Sullivan and Cromwell does something very important, which is that they go to the prosecutors. Now that's a problem for a couple of reasons. Number One, you're not really supposed to go to the prosecutors and rat your client out unless a couple of things are true. Number One, you're sure there's a crime, and we don't know that
they had determined that. Number Two, you've gone to the highest authority in the company to confirm that there's a crime and confront them and say, by the way, we think there's a crime, you should stop committing that crime. We don't think there's any evidence of that. And then number three, say to that highest authority, if you don't stop. We might have to go to the authorities because otherwise we'll be implicated in it, and we don't want that.
We don't see any evidence that that happened either, quite the contrary. So the second thing that happens that's really problematic is that on that same day, November ninth, when they went to the prosecutors, the same lawyer, Andy Dieterrick, sent Sam Bateman Freed what I think is a very important email. I call it the reassurance email. At nine point thirty two that evening, he sends Sam an email basically saying, look, we are here to help you in
your efforts to rescue FTX however we can. And that meant something very specific because basically Sam's view of life, as far as I can tell, was he thought there was just a liquidity crisis and that crisis could be solved by finding more liquidity, finding new loans, which is normally what happens when companies have liquidity crises but are
otherwise basically sound. So Solivon Cromwell, this attorney, mister Deeter, sends Sam this email saying we're here to help you do that however we can, and you know by the way, we need you to sign a contract to hire Genre. He'll come in as what's known as the Chief Restructuring Officer a CRO, which implies that Sam would remain the CEO of the chief executive officer. Sam, we want you to remain director, Sam. We want you to continue to go out and find resources for the company. You know,
financing for the company. Sam, you know, the bankruptcy if that happens at all, it's just an alternative, and it's a couple of weeks away, but we need to be ready. And here are some things that we need you to do.
All very normal things to say to a client that is facing a liquidity crisis and may have to go into bankruptcy, but not what you say to a client who you think is committed crimes, and when you've already, you know, without the knowledge of that client, gone to the prosecutors to inform the prosecutors apparently that there were crimes ongoing. So, to me, the second big problem, and in some ways, you know, I don't know if it's the biggest, but it's a really big one, is what
I appears to us to have been deception. Now, maybe it turns out that there's more to the story than we know. Maybe Sam knew. Sam has you know, I talked to him. He said no, absolutely not. We had no idea. He did have his own lawyers by this point, right, Paul Weiss was involved, and you know, I don't know if they knew or not. If they did, there's a
different kind of problem. But in any case, you know that this reassurance email I think is all in service of getting Sam to do the thing that he did then in the early morning hours I guess the eleventh of November, which is sign over not just control of the company but all of his powers, you know, having anything to do with company to John Ray, which you know ends up being I think, from bankman Freed's perspective, disasters.
Given how that, it's unusual that Sullivan and Cromwell would have gone to the prosecutors right away. Do you have any thoughts about why they might have done that.
I do. I think that that's to me most consistent with a story panic. I think they correctly view themselves as being really important intermediaries between large, important regulated companies and the folks who regulate those companies, and if you've been making a significant mistake with those regulators for a while with a prominent company, and you wake up one morning and realize that, like maybe you panic, Maybe that's a problem for you. Now there are a variety of
ways you could fix that. They could have, you know, withdrawn and perhaps tried to ameliorate that with the regulators. And maybe they even did that. We don't know, because although they had filed an application for FTX with the CFTC, they withdrew it the same day that the company went into bankruptcy, the eleventh of November, and nobody's ever seen it since then. So we don't really know what else they said to the CFTC, but we know a little bit.
But so I think they were just concerned about protecting their reputation. I think it's also true that, you know, Dieter k had said like, look, we want to build a Chapter eleven practice here. We don't have one. Right. We are great litigators, we're great regulatory lawyers, we're great corporate lawyers. But we should also be doing Chapter eleven work.
And this might be an entree into it. More importantly, I think, from a very strategic standpoint, is if you're the lawyer for the company in bankruptcy, as Solving promo is, you control the process, You control all of the information at the company. As a practical matter, unless you have a fight with management, you and management will be aligned
on really everything having to do with the company. And so one of the things that we figured out very early on is that it appeared that Solving, Cromwell and Ray were actually providing significant support to the prosecution of Bankman Freed.
How unusual is that? I mean, the creditors are paying for that. Solivan and Crommell's billing the company to provide the prosecutors with information that will help them make their case against Sam Bankman Freed. Creditors don't sign off on that. It's unclear why that's even in the creditors' interests. So how do they is that? Is that unusual? I mean, I just don't know. Is it unusual? And yeah, it's unusual? Hous it unusual?
Yeah, it's a great question. So I want to be careful here. I mean, you know there the creditors are represented in the case by an official committee of unsecured creditors yep, and they have their own lawyers of firm called Paul Hasting's a very good firm, and you know, one response, you can imagine Solving Cromwell having to anything we have to say as well, like, look, the creditors
have lawyers and they haven't objected to it. I have never seen this level of support by a company in bankruptcy for the prosecution of its insiders at you know, this level, this cost, this intensity. I haven't studied it
carefully because it doesn't happen much. And certainly it makes sense for the company to cooperate and to enter into some kind of plea agreement or something of some sort with the prosecutors, you know, which I think does happen fairly frequently, and part of that will, you know, undoubtedly require some cooperation. The cooperation is different from running analyzes.
And you know, one of the lawyers for Solving and Cromwell gets up in court in I think February of twenty three at the hearing on the appointment of the Examiner, initial hearing on that and says, you know, we've been doing tens of millions of dollars worth of work in
support of the prosecution and other interactions with regulars. Well, that's shocking, that's shocking, because that's tens of millions of creditor dollars that they're spending on this, and I think he thought that that was in service of the argument that we don't need an examiner because we'd have to spend tens of millions of dollars on an examiner too, which isn't really true because the examiner is really just focusing on Solivan and Cromwell, not all the other stuff.
But it was pretty surprising. It was pretty surprising.
I guess how much ConTroll do John Ray and Sullivan and Cromwell have of the information inside of FTX, Like how easily accessed is that information by either the prosecutors or the defense attorneys, And how hard is it to see inside and see why they're doing what they're doing.
Yeah, great question. So first of all, I think Ray, you know, is the CEO of a company, has, you know, all the powers that bankman free would have had enhanced to a certain extent by the bankruptcy good, so he controls it all. Counsel to the company solventing problem was retained by Ray. That was I think one of the first things he did. So they too have unfettered access to all of the company's information, all the company's resources.
I think that's a lot of money, a lot of other assets, and they can decide who gets to see it and who doesn't. So, for example, I think they decided to let the prosecutor see, you know, if not all of it, a great deal of it, and to perform significant analyzes. That's certainly what Bankman Freed's lawyers alleged in the criminal case, and we've seen some evidence of
that independently. But they're not obligated to share it with anybody else if they don't want to, so they haven't, for example, allowed Bankment Freed access to any of the information as far as I can tell at all, which creates a very basic problem in criminal law, which is a little outside of my expertise, but basically, you know, the concern that was raised in the criminal trial is, look, the government has a due need to provide what's called
for exculpatory information, evidence that you know they have that would exonerate Sam. The government has that duty, but other private actors don't have that duty. And so the fight in the criminal trial and part was about whether ft X had the duty to provide exculpatory evidence to help Sam's defense, and the answer was no, right, they didn't have to do that and didn't do that. And so it's not at all difficult to imagine that the prosecutors
were like, this is awesome. This is the best thing that's ever happened to us, because we have really smart lawyers and other people to analyze this stuff, and we don't have to share hardly any of it unless we choose to with the defense. It's like kaching, like it's awesome for the prosecutors, right, I mean, it's you know,
it's and you can imagine that. And I don't mean, you know, cast us persons on the prosecutors, like, I think they have very good reason to want to take advantage of this right.
They would to win. They would to win exactly right. I mean, your paper pointed out something it had not. It's an idiocy of mine had not occurred to me, and that was that the check on the bankruptcy process is the Department of Justice. The person in the bankruptcy, the trustee is a is an employee of the Department of Justice. But it's also the Department of Justice that's
bringing the case against Sam Bankman free. And so you wonder what happened between when you see that the trustee not pressing really hard for an examiner or not making a huge stink when the examiner is not appointed, you wonder what conversations occurred within the Department of Justice on this subject.
No, that's a great point, and yes, I mean we you know that the subtitle of the paper is conflicts of you know, public and private interests in chapter eleven, because you know, it's easy enough to say, well, it looks like there might be some evidence that Sullivan and Cromwell had a kind of private conflict of interest. They didn't want any of their mistakes, you know, before bankruptcy to be revealed, and so they're you know, use the
bankruptcy to conceal that. But it's also apparently the case that there was some kind of conflict between the public actors here, as you point out. So the US Trustee Program is the watchdog for the bankruptcy system, and they're not the only people are going to ask for an examiner, but they did here, and they often are the ones who do. They're the ones who was supposed to police for conflicts of interest, and they did object to solvent Cromwell's retention. But I'm not sure they knew any of
the stuff that we've now put forward. But at the same time, the Southern District of New York US Attorney program is part of the Department of Justice, and it's not at all difficult to imagine that there were tough negotiations between them, Because if the prosecutors are getting really important support from FTX and Solivan Cromwell, you know, who have a very large and very well respected white collar practice, maybe the US attorneys in New York don't want anybody
to toss Solivan Cromwell out on grounds that they have some kind of conflict. Maybe you don't want an examiner coming in and poking around to figure any of that stuff out. So there's a tension. There's a kind of conflict, we think, between the US trustee, who wants this transparency and wants this stuff to come out because that's their job, and the prosecutors, who, under these circumstances, which we think are probably unusual, to say no, no, no, no, this is like
a really good thing, do not mess it up. And you know, obviously we have no idea if that's really true, although we have good reason to think it is. Certainly we have no idea how it gets resolved, because there is no rule book for resolving those kinds of you know, internal disputes in the Department of Justice, at least not one that's public.
Judging. Sam will be right back. We're back. So there's one other thing I wanted to ask you about. It seems that's one of the unusual things about the ftics bankruptcy is just how many assets were still there. It's sounding more and more like the deposit are going to get all their money back with interest, that they're sitting on a pile of many, many billions of dollars of assets. And is that unusual? Is it unusual for the bankrupt company to have such wealth inside of it? And does
that change? Does that have is that queering in any way the way the bankruptcy might be conducted, Like, does it, for example, create an incentive to string it out longer because it's because you can actually bill so much more because the money is there.
Yeah, So put that incentive question to one side, because that is the right question, and we'll come back to it in a second. You know, the crypto cases are kind of unusual because you know, these firms, especially the exchanges, seem to look a little bit like banks, but they weren't regulated like banks, and banks themselves are not allowed to go into bankruptcy for a good reason, like it
would totally screw up the system if they could. You know, I think most companies when they go into bankruptcy that have you know, any real business that's going you know, they're not going to be solvent, and they're not going
to pay creditors in full, but they'll pay something. Probably they will pay them, you know, partially in cash and partially in stock of the company will issue new stock, and they'll wipe out the old shareholders, which is intuitive, right, Like all right, well, you know, the old shared holders took the risk and they lost you know, the kinds of assets that the peers saw that FTX was sitting on, you know, like anthropic stock, like all that stuff seems
extraordinary to me. I think you called it in your book the Dragon's Layer, which I thought was such a colorful, you know, way of capturing this strange collection of assets, many of which turned out to be quite valuable that Alameda or you know, other entities and the complex were
holding on to and that's highly unusual. The other thing to bear in mind is that even though the company has said, well, we think that customers may get their deposits back, they've said that the value of those deposits has been determined as of the data of the bankruptcy petition, which is November eleventh, when the value of those deposits was quite a bit lower, right, So, well.
Means they all got dollarized. Then it was sort of like if you had crypto, you got the dollar value equivalent and that's what you're going to get back.
So you right, And that's very different from actually getting your crypto back, because to day that crypto is it sounds like it's worth a great deal more than it was back then. And so you know, if if in fact it was your crypto, always, even if the company was comingling, it should just be your crypto. They should just give it back to you. And if it's worth more, muzzle tough. And if it's not worth more, it's too bad for you. But neither way, right, the company is
getting the delta there. The company is getting the delta there, and that in part is presumably subsidizing everything else that's happening. On top of the fact that the company did have all of these assets, some of which looked like they were extremely valuable. Now your question about incentives is the right one, which is like, well, who's got what incentives here?
You know, ordinarily in a reorganization, the lawyers always get paid off the top, and you know, people grouse about it, but it's not a big deal because otherwise, how are you going to get it done? Right?
Can't?
And so you know, the company make sure that its plan to reorganize has you know, sufficient cash build into it to make sure that those lawyers get paid. But mostly the money is going to go to keep the company going. One of the most troubling things in the bankruptcy here is that it doesn't really look like Ray ever honored the promise that deeterrik had made to Bankman Free back in November ninth of twenty twenty two, which is like, we're here to help you rescue this company.
And you know that would presumably have involved finding new financing to you know, provide the liquidity that you needed to permit withdrawals to start again and to then keep going. Because if the company was fundamentally profitable but have this you know, serious problem. I don't think anybody disputes there was a serious problem of commingling, right, But you've stopped
that problem and you've found ways to fix it. And otherwise these exchanges are pretty viable, like the most value for the most people, but would come from keeping the business going. One of the other remarkable things about the Examiner hearing again from you know about a year ago, little over a year ago, is that Ray testifies extensively and he says, I never talked to Bangman Freed Yea.
He told me that I couldn't. That blew my mind too, because it's he and the other executives are trove of information. You would think you'd want the information, but he told me he didn't. As a matter of principle, he said he didn't speak to him.
Very early in the case. Because what did Sam do in the middle of November of twenty twenty two. He did what Sullivan Cromwell encouraged him to do and what he thought he should be doing, which is trying to find rescue financing. So he goes out and he gets Tron and Numura and who knows, you know, all these other folks to say, yeah, we'll lend you three or four billion dollars. Now I have no idea if those were worth the paper that they were written on, Like,
I just don't know. I do know that your job as the CEO of the company in chapter eleven is to at least figure it out right, take a look at them, say ah hm, are these good or not? Like Sam, tell me about these things. We understand you might have some other issues, but at least at least, like, you know, make the connection, help us understand how we
can do this. And they didn't do that, and that to me is extraordinary, right, It's extraordinary for a couple of reasons, one being that, like if the point of having this whole system Congress created in the seventies is to keep viable companies going, then for whatever reasons, a
decision was made to not do that. Now we don't know obviously internally what was going on, and they definitely made they being FTX and Solvent Promo made some you know, statements about possibly restarting the exchange, and so maybe they tried.
I know, ultimately they didn't, and they just blamed it on Bateman Free But again it you know, if Ray was correct when he said, well, this is just old fashion embezzlement, and we know factually everybody agrees that there was commingling between Alameda and FTX, and that I think that was stopped then, Like this was a simple problem and that the criminal part of it was solved a while ago or very easily. So why not restart the
exchanges if you think they're fundamentally sound? Like this problem it was like, you know, it was like a benign tumor. It was a tumor. It had to be taken out, but it was benign and there was no reason to think that it had metastasie.
And so getting back to you, why wouldn't they have done that? What are their incentives and the.
Incentives I think they're sort of two conflicting ones. One is the one kind of on the surface that you identify, which is like, well, you know, the lawyers can make lots and lots of money in the case by billing, and so in fact they have, I mean, the billing rate in the case has been extraordinary. So that's on the surface. But as I said earlier, like I don't think Sullivan Cromwell was interested in stealing the business from bankman Freed like to make money on it, right, I mean,
like they don't need the money. I think they were concerned about embarrassment. I think they wanted to maintain good relations with the government and public actors. And number two and this is a little more subtle. You know, you can imagine that Sullivan Cromwell sort of shows up at the prosecutor's office on November ninth and says, we know you've been concerned about Crypto for a while. We've got
a story to tell you. And then you know, maybe that prosecutors were already thinking about it and investigating whatever, but they come to realize that, like, there's this incredibly fortuitous set of events that can make it possible for Sullivan and Cromwell to really be heroes to the prosecutors that they work with all the time, to be heroes to the regulators who they might have you know, misled a little bit earlier, but who they've now made, you know,
functional amends with. And by the way, we get to build a chapter eleven practice along the way. So I think those are the kinds of incentives that are more plausibly at work. But again, you know, we don't know there's more to the story, and we don't know what that story.
But why does that lead to not trying to restart the company as a going enterprise.
Right, because if you restart the company is a going enterprise, it comes out of bankruptcy sooner, and I think more information about the company comes out sooner. What I think is going to happen is, if you know, FTX and Solvent and Promwell are able to do what they want to do, they're going to liquidate the company and seal all the records.
So no, don't do No one will ever know what happened.
Correct, And so if you reorganize the company instead and
it survives as a going concern, oh guess what. They're going to be managers, and they're going to be shareholders, and they're going to be other human beings interacting with this large company, and they're going to learn all sorts of stuff that might not be so great for Solving and Cromwell, mostly about what happened in that moment of panic, if it was in fact a moment of panic, and then thereafter, because there were many, many puzzling decisions made
during the bankruptcy case that are hard to explain accept perhaps as a way of helping Solve and Promwell manage these other problems, which is, you know, if we're right, is a very very big problem. All of that would come out eventually if the company were reorganized.
So the Court of Appeals reversed the bankruptcy judge on the subject of the examiner. How unusual is that? How unusual is it for a court of appeals to say, to tell the bankruptcy judge, know you did it wrong?
So it was this is the third Circuit Court of Appeals, which is, you know, a very sort of well regarded powerful court. I don't think the reversal rate. I don't think it was that unusual, and especially in this case, because the statute is clear. It's obvious. It's so obvious, right, And so to me, part of what's so interesting about this, and I don't know the answer is why Solivan Cromwell didn't just settle this request for an examiner back when
the US Trustee made the request. Because if I'm Solivan and Cromwell, like I should be like, sure, we have nothing to hide here, guys, there's no problem here, bring an examiner, and like, let's keep it focused on you know, you concerned about our conflict. We have no conflict. We got nothing to hide from you. And keep it short, keep it sweet, keep it focused, all of which they
could have done by agreement with the US Trustee. And that like, if I'm Solivan Promo, that's a total win because you can say, hey, we had an examiner, We're all fine, Like he gave us a clean bill of health. Nothing to see here, guys. And by the way, if that had happened, I wouldn't be here right.
An attorney named Bob Cleary has been appointed as the examiner, and I'm curious what happens next. Is he a genuinely independent person or is he Is he a bankruptcy person who's is a repeat player in this in the bankruptcy system.
No, definitely not that he was the prosecutor. Apparently the prosecutor who prosecuted the unibomber ted Kazinski. Oh, when he was a prosecutor, and now he's a white collar, you know, criminal defense lawyer at Patterson Bell Knapp is not a bankruptcy insider. If I guess, I would say he's probably very independent. I think the bigger question about Cleary is going to be how much access he really has to
what really happened. And it's not at all difficult for Solivan Promo FTX just row sand in his gears.
How would they do that? How would they do that? So he does have the right to walk in and ask for anything.
I have not seen the final order on the scope of his retention, but unless it orders the company to waive privilege and you know, gives him access to everything, even if it's been designated confidential, he's going to have to ask for it. And the company absolutely can fight about things like privilege, attorney client privilege, and can absolutely fight about things like confidentiality. My guess is that at this point Sullivan and Cromwell probably won't fight too hard,
certainly not openly. I mean, they were fighting the examiner tooth and nail until a couple of weeks ago, and then they seem to have stopped. So I think they understand that, you know, they should just sort of you know, like take the medicine and deal with it. But they can still you know, fight in sort of small ways.
And whether clearly has the resources meaning basically the money, the budget for the bankruptcy court, you know, really from the company, Whether the bankruptcy court has the patience to deal with challenges buy cleary to whatever Solivon Cromwell, may or FTX might be withholding. You know, those are questions that will have to be answered. He's going to produce a report in fairly short order. My hunt is that it will say something like this. You know, we've investigated.
We couldn't get everything we wanted to see. We saw a lot. We think there's some problems. This is not great, but you know, mostly the problems that we've seen would involve claims of you know, an ethical nature having to do with bankment freed and they don't really affect the bankruptcy. The scope of our retention really doesn't ask us to
look at the whole bankruptcy and everything else. So, you know, unless the judge wants to do a fuller thing, you know, we're not really going to say but we'll wag a finger at Sulivan Cromwell and we'll let it go. Now that's not great, but it wouldn't be terribly surprising. That's why we say in the paper we think that most of the damage has been done and it can't be undone.
Do you have any idea whether Bob Cleary is read your paper.
Not a clue?
Well, he should write, I mean if he reads your paper he's going to have, he's gonna be able to ask some questions that he might it might not occur to him otherwise.
Absolutely, and for that matter, Solivon Cromwell should read it, right, I mean, like, you know, we are not hiding anything from them. They may well have a different version of the facts than we have. Undoubtedly they do. Undoubtedly they know more facts than we know. And if they think we have gotten something wrong, if they think we are missing some important things, like they should tell us, like you know, we're not. We're not here to get anybody. We're just here to get the truth.
How did talking to Sam directly and his mom affect your view of the case.
Yeah, that's a great question. I you know, got connected to them initially through a colleague of mine at Stanford who's you know, called me after I'd already agreed to do the Amigas brief to say, you know, can I tell you this crazy story and ask you a favor? And he told me, you know, basically Sam's version of the Solvent Cromwell stole the company from me story. And I was like, yeah, that can't be right, that's nuts.
He's like, well, look would you talk to them? Would you do me a favor and talk to them about this? I'm like, of course, I'll talk to anybody. I can't be the lawyer, but I'll talk to anybody. And I did talk to them, and you know, he sent me, They sent me the you know, all the stuff that Sam was sending to everybody about this, and over time I came to appreciate that there was more to the story than just solving Cromwell's version of it.
What did do you come come away from this experience thinking that the bankruptcy system needs to be reformed.
M That's a great question. So no, David and I do have some pretty concrete recommendations in the final part of the paper, like we think maybe, you know, we should use examiners a little more frequently on a somewhat more targeted basis, because again, you need this kind of
outside check. We think in a broader class of cases, we absolutely think that judges should take much more seriously questions about whether the lawyers for the company who have so much control and power in these cases, really had any pre bankruptcy relationships here, you know, or in any case like this, and it's you know, it's it's tricky because you know, every large firm has done something for every large company, So I've always had some kind of relationship,
not always but frequently. It's not hard to imagine it, but you really, you know, need to like take a beat if you're the judge, think about like, okay, exactly what's going on here. So, you know, we think judges should be more mindful of this kind of problem. We think that you should use examiners a little bit more. We think the US Trustee should probably have more independence in the Justice Department or from the Justice Department, maybe
be housed outside. You know, the truth is the US Trustee is often the only person coming into the bankrupcy court and saying like, hey, guys, we think there's a problem here. Can you please slow this down? And you know, the I think sometimes the judges feel like the US Trustees are just kind of meddlesome bureaucrats and they don't maybe you know, get quite the difference that they deserve.
You know, here they were I think, onto something very important, even though they were limited in what they could do because of the relationship with the prosecutors.
The paper was great. It's very very I mean for a for this kind of thing, it was really it was a page turner.
Se congratulations, Well, that is very kind of been thinking.
Jonathan Lipson is a bankruptcy expert at Temple University. And as for Sullivan Cromwell, all I can say is that a spokesperson for Sullivan and Cromwell referred me to a statement from the FTX debtors which reads as follows quote.
In an effort to support mister Bankman Freed at the expense of his victims and the dedicated professionals who have worked tirelessly to rectify the harm he caused, certain academics and others have parroted his false narratives, certain of which cite their source as being interviews with Sam Bankmanfreed and his parents in an attempt to elevate his standing and image before the court that is about to sentence him.
In fact, but for the work of a large team of committed advisors, including Sullivan and Cromwell and others who have been unfairly maligned as part of mister Bankman Freed's defense strategy, billions of additional dollars would have been lost or stolen, and the recoveries to customers would be a fraction of what we can now expect. It's time to
put blame where it rightfully belongs. And coming up on Judging Sam, I'll be in court for a sentencing and I'm also going to speak to a formal federal prosecutor and possibly Sam Bagman freed himself. Judging Sam is hosted by Me Michael Lewis Lydia Gene Kott is our court reporter. This episode was produced by Ariella Markowitz and edited by Jacob Goldstein. It was engineered by Sarah Bruguer. The music was composed by Matthias Bossi and John Evans of stell
Wagon Symphonette. Judging Sam is a production of Pushkin Industries. To find more Pushkin podcasts, listen on the iHeartRadio app, Apple Podcasts, or wherever you listen to podcasts. If you'd like to access bonus episodes and listen ad free, don't forget to sign up for a Pushkin Play subscription at pushkin, dot fm, slash plus, or on our Apple show page.