How did FTX spend 120 million U.S. dollars in three months and was "defrauded" by the law firm?

Author: Roy Strom, Bloomberglaw; Compiler: Daily Planet

As FTX's bankruptcy reorganization proceeds, the ever-increasing legal costs have aroused great concern.

According to documents filed by FTX consultants on June 15, FTX’s expenses totaled $121.8 million between February 1 and April 30, including expenses such as legal, consulting and financial services.

**Among them, Sullivan & Cromwell law firm charged $37.6 million, accounting for 30.9% of total fees and expenses; investment bank Jefferies charged the lowest fees, only over $700,000, accounting for 0.6% of total fees and expenses; Alez and Marsel $37 million in restructuring consultant fees, including $1.1 million in fees—including $51,225 for meals, $149,155 for lodging, and $1,995 for other miscellaneous expenses; FTI Consulting spent about $686.8 hours, and will be charged $761,997.70. **

It should be noted that according to the provisions of the U.S. bankruptcy law, the above-mentioned expenses will have a higher priority than the unsecured ordinary claims before filing for bankruptcy in the future, that is, various management expenses will be settled first before the creditors are compensated.

Of course, John J. Ray III, the current CEO of FTX with an hourly salary of $1,300, is not without achievements. At the hearing in Delaware in May, FTX lawyers stated that more than $7.3 billion in assets had been recovered, an increase of $800 million compared to January-this is undoubtedly a good signal for creditors. In addition, John J. Ray III also confirmed the FTX 2.0 plan and plans to restart FTX.

However, the transparency and rationality of related expenses are still controversial, and John J. Ray III obviously did not do well in this regard.

**Recently, Bloomberglaw reporter Roy Strom wrote an article introducing the tricks behind FTX's legal spending issue. The following is the original text. **

For law graduates who are about to enter the largest law firms in the country, it can be very anxious now. Some law firms are laying off lawyers and delaying paralegal entry dates in hopes of cutting costs at a time when corporate transaction volume has plummeted. But there is one area where some big law firms are constantly hiring: bankruptcy cases.

Newcomer lawyers at firms such as Sullivan & Cromwell (FTX lawyers), Quinn Emanuel Urquhart & Sullivan (FTX consultants), Paul Hastings, and others are billing more hours on major bankruptcy cases. Some of those lawyers needed to become licensed lawyers in May or June of this year, according to registration records with the New York Bar Association. Many of the class of 2022 law graduates will start charging fees before they even get licensed to practice law.

At Sullivan & Cromwell, for example, at least 33 of its 2022 graduates began charging hourly fees in the FTX bankruptcy case. The fledgling lawyers, who typically charge $775 an hour, worked more than 9,500 hours for a total bill of more than $7.4 million, according to court documents filed by the company.

In just six months, Sullivan & Cromwell's 33 new lawyers brought in an average of about $225,000 -- a case not expected to end anytime soon, and soon they will add to the firm Profits - Helped Sullivan & Cromwell generate nearly $6 million in profits per equity partner. The fees charged by the new lawyers are only a fraction of the $80 million Sullivan & Cromwell charged to FTX.

In fact, many corporate clients will refuse to pay for new lawyers - they believe that they should not pay while the "junior lawyer" is in the process of learning the barrister's business. In New York, undocumented graduates are studying for the bar exam while working for firms or waiting for exam results last February or July.

Legal ethics lawyer Jan Jacobowitz said law graduates could do research, review documents, proofread, but they just couldn't give legal advice to clients. Undocumented graduates must work under the supervision of lawyers, she said. "Under the Code of Professional Conduct, law graduates are considered 'non-lawyers.' The rules state that law firm management should develop policies and procedures so that all lawyers and non-lawyers adhere to legal codes of ethics."

In the case of Sullivan & Cromwell specifically, the most effective attorney involved in the FTX case was not yet registered as a licensed attorney in New York. After passing the judicial examination in July 2022, she has been driving "night trains" (implying illegal employment). In February alone, the lawyer averaged more than seven hours a day; over a six-month period, he billed more than 950 hours and earned the firm $740,000, court records show.

Court documents also show that another newcomer lawyer at Sullivan & Cromwell Law Firm passed the New York bar exam in February 2022, but also did not obtain a New York license to practice law. Other new attorneys charge $775. She charges the same rate as another attorney who graduated from law school in 2019 and licensed in 2020, and lawyers who graduated in 2021 typically charge $960 an hour.

Sullivan & Cromwell isn't the only firm staffing upstart lawyers in Chapter 11 bankruptcy cases.

Quinn Emanuel, who was hired as special counsel on litigation in the FTX case, has seven attorneys who won't be licensed until 2023. They charged $747 an hour and earned nearly $665,000, according to court documents, and the company billed undocumented law graduates as legal assistants for $508.50.

Paul Hastings also has two new lawyers in the FTX case who are counsel to the creditors' committee. In March of this year, Paul Hastings' new lawyer worked 243 hours, including weekends, an average of nearly 8 hours a day. Currently, Paul Hastings' fees have risen to $855 an hour, up from $755 an hour in February; to date, the firm has billed nearly $950,000.

Here comes the question, is it still too late to switch to a bankruptcy lawyer?