Wed 02/28/2024 14:04 PM
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Yesterday, Tuesday, Feb. 27, the U.S. Trustee filed a notice appointing Robert J. Cleary of Patterson Belknap as examiner in the FTX cases as well as a motion proposing the scope, duration and cost of the examiner’s investigation. On Jan. 19, the U.S. Court of Appeals for the Third Circuit sided with the UST in an appeal from the FTX bankruptcy and ruled that bankruptcy courts lack discretion to deny appointment of an examiner upon request by any party-in-interest in cases involving more than $5 million in debt.

A hearing on the UST’s motion is scheduled for March 20 at 10 a.m. ET, with objections due March 13 at 4 p.m. ET.

In keeping with Judge John Dorsey’s “preliminary thoughts” on the contours of the investigation, as discussed at a Jan. 24 hearing, the UST’s motion proposes that the investigation would be split into phases. As proposed, the examiner would produce a report at the end of an initial 60-day phase. The report would review the scope and findings of investigations conducted by the debtors, the official committee of unsecured creditors, governmental units and other third parties to make recommendations for any additional investigations that the examiner “believes” would be “necessary or helpful to the Court or the Debtors’ estates” or would further public interest.

The report would also cover topics identified by the Third Circuit’s opinion directing the examiner’s appointment, including an examination (i) of the bankruptcy court’s ruling approving Sullivan & Cromwell’s appointment as debtors’ counsel, including whether there are potential conflicts of interest involving S&C which were not addressed by the court; (ii) whether the investigations addressed fraud by employees; and (iii) whether the prior investigations addressed the debtors’ use of FTT to inflate its value.

The UST notes that it deviated from Judge Dorsey’s “preliminary thoughts” in requesting 60 days for the examiner to complete the initial phase because the number of investigations to be undertaken by the examiner “warrants a limited amount of additional time beyond the Court’s 30-45 day estimate for the Examiner to complete his review of same.” The scope, cost and timeline of subsequent phases, if any, authorized by the court after the initial report, “should be addressed on notice, after the report on the Initial Phase of the Examination is filed,” the UST adds.

The motion also indicates that the cost of the initial phase would not exceed $1.1 million, assuming “no impediments to or delays in the Examiner gaining access to all relevant information,” but if that assumption “is not met” in the examiner’s sole discretion, the cost of the initial phase could increase to $1.6 million without a further court order.

Sullivan & Cromwell is the target of a recent class-action complaint by FTX customers accusing the firm of aiding and abetting the “multibillion dollar” fraud perpetrated by FTX management and serving as the “primary” legal counsel to a federal Racketeer Influenced and Corrupt Organizations Act enterprise. The class action was administratively consolidated in a preexisting multidistrict litigation in the U.S. District Court for the Southern District of Florida relating to the FTX fraud on Feb. 20.
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