By Mark S. Nelson, J.D
Counsel for assorted debtors and debtors in possession in the FTX Trading LTD bankruptcy case have filed a complaint alleging, among other things, that an attorney who represented FTX entities in both private practice and then as an employee of FTX engaged in legal malpractice by participating in or otherwise enabling numerous acts of wrongdoing by executives at FTX. FTX spectacularly imploded last year after it was revealed that insiders at the crypto trading company had engaged in a raft of alleged misconduct resulting in federal civil and criminal charges against key executives, including co-founder Samuel Bankman-Fried (In re FTX Trading LTD., June 27, 2023).
The complaint asserts multiple counts focused on bankruptcy law, breach of fiduciary duty, and waste. But at the heart of the complaint lies a count alleging legal malpractice against Daniel Friedberg, who represented FTX entities while in private practice between 2017 and January 2020, after which Friedberg worked in various capacities at FTX, including as general counsel and Chief Compliance/Regulatory Officer.
According to the complaint, Friedberg failed to live up to the standard of care of an attorney in representing FTX in the multiple roles he held with the company. For example, Friedberg is accused of not implementing internal controls that might have prevented the many acts of alleged wrongdoing at FTX. Similarly, Friedberg is alleged to have failed to investigate allegations of fraud, with participating in or enabling FTX insiders to commingle and divert customer funds, and with facilitating personal loans to FTX insiders.
The commingling of funds is presented in more detail in “The Second Interim Report of John J. Ray III to the Independent Directors: The Commingling and Misuse of Customer Deposits at FTX.COM,” which was filed with the court on June 26, 2023. The report concluded broadly that: “The FTX Senior Executives did not commingle and misuse customer deposits by accident. Commingling and misuse occurred at their direction, and by their design.” Figure 1 in the report (see p. 15) depicts a spaghetti bowl of transfers of commingled funds in “Primary Deposit Accounts from the inception of the FTX.com exchange in April 2019 through November 11, 2022, the date of the FTX Group’s bankruptcy petition.”
The complaint also alleged that Friedberg failed to investigate whistleblower complaints and that he permitted unreasonable settlements of whistleblower claims. The complaint described Friedberg as Bankman-Fried’s “fixer” in this context. “He not only settled the complaints for inflated amounts, in some instances he arranged for the FTX Group to retain the whistleblowers’ attorneys post-settlement, thereby buying or otherwise ensuring their silence,” said the complaint.
The complaint detailed several examples of whistleblower complaints that Friedberg allegedly mishandled. The whistleblowers had raised concerns about crypto currency price manipulation, that the hedge fund Alameda was “an extension of FTX,” and governance and regulatory issues such as concerns about the lack of money transmitter licenses for certain disbursements by Alameda-linked entities.
The case is No. 22-11068.