The court-appointed examiner, Robert J. Cleary, has released a detailed report recommending further investigations into several aspects of the collapsed FTX Group.

The report focuses on FTX.US, its asset management practices, and its legal representation by Sullivan & Cromwell (S&C).

Cleary's report, submitted to the US Bankruptcy Court for the District of Delaware, outlines the need for three lines of investigation into FTX Group's downfall.

FTX.US Balance Sheet Shortfalls

The first essential recommendation centers on FTX.US balance sheet shortfalls. The report highlights concerns over recurring "holes" or shortfalls in FTX.US's balance sheet.

These gaps, particularly evident in November 2022, suggest a possible commingling of customer and corporate assets, indicating a potential misuse of funds.

The examiner emphasized the need for a comprehensive investigation to determine the causes, frequency, and resolution of these shortfalls. This may uncover additional misconduct and bolster public confidence in the bankruptcy process.

Pre-Bankruptcy Sale of Ledger Holdings Inc.

The examiner also recommended a probe into the pre-bankruptcy sale of Ledger Holdings Inc. (LHI) to West Realm Shires Inc., seeking to identify potential avoidance actions against former shareholders who might still hold claims against the estate.

The inquiry could provide deeper insights into the transactions leading up to the bankruptcy and uncover additional assets for recovery.

Role of Sullivan & Cromwell LLP

The examiner called for a focused inquiry into the role of Sullivan & Cromwell LLP (S&C), the law firm representing FTX, particularly concerning its representation of Sam Bankman-Fried during his purchase of Robinhood shares.

The investigation aims to determine whether S&C was aware of the fraudulent activities within FTX and whether there were any conflicts of interest that the court should have considered when approving their retention as counsel.

If S&C's representation of Samuel Bankman-Fried during his purchase of Robinhood Markets shares is improper or conflicted, it could have legal and financial implications for Bankman-Fried and other individuals involved.

That might include revisiting the transactions and potentially reversing or renegotiating terms. It would also disqualify the law firm from representing debtors further in the bankruptcy proceedings.

S&C's broader representation of FTX has generated significant controversy. Bankman-Fried claimed S&C pressured him into bankruptcy to earn legal fees in December 2022, while former FTX CTO Daniel Friedberg alleged misconduct in January 2023.

Reports in 2023 indicated that S&C billed FTX approximately $70 million over five months of bankruptcy proceedings. As of April 2024, the firm has charged $170 million in cumulative fees, according to Bloomberg.

The matter entered civil courts in February 2024, as former FTX investigators filed a class action suit alleging the firm aided FTX's wrongdoing.