Zazology & S.B.F.’s Appeal Thesis

Welcome back to Dry Powder. I’m William D. Cohan. The saga of FTX is far from over, as Sam Bankman-Fried remains imprisoned in Brooklyn’s Metropolitan Detention Center (where I interviewed him on May 7) plotting his appeal strategy. In an effort to figure out what is likely to be Sam’s argument on appeal, I dug through the various public filings and court records in search of clues… But first…

Notes on Zaz’s NBA bid: I am not yet counting out David Zaslav’s ability to pry an NBA package out of NBC’s hands. Comcast C.E.O. Brian Roberts, of course, recently bid $2.5 billion a year for the “B package.” I think Zaz still wants the NBA, and he’s surely tried to show his fealty by being courtside for a few of the Knicks’ home games during the playoffs, along with a little John McEnroe here and some Lloyd Blankfein there. After all, TNT/TBS has been the NBA’s partners for 40 years or so now. And if he views the “B package” as uneconomical, he may instruct his lawyers to use WBD’s matching rights to get the “C package” that Amazon has bid on for around $1.8 billion a year for 11 years.Alas, the NBA wants a streamer, and WBD may not be able to match the windows and opportunities afforded by Amazon. And Zaz is certainly wise to be cautious with $20 billion-$25 billion in commitments, given Warner Bros. Discovery’s nearly $40 billion of debt. All that said, Zaz seems to be in deal mode, whether it’s the Venu streaming joint venture with Disney and Fox or the recently announced bundle with Disney+ and Hulu. My bet is that he really wants to keep the NBA and he will find a way to do so—unless he has something else up his sleeve.

Sleuthing the S.B.F. Appeal

Sam Bankman-Fried may be locked up for 25 years for one of the greatest financial crimes in history. But clues to his appeal strategy may be emerging.

WILLIAM D. COHAN

On April 11, a few weeks after Sam Bankman-Fried was sentenced to 25 years in prison and ordered to pay $11 billion in restitution following his conviction on seven criminal counts in federal court—all for “one of the largest financial frauds in history,” as U.S. Attorney Damian Williams put it—he filed a notice that he intends to appeal. The filing cost him $605, and his lawyer for the appeal is listed as Alexandra A.E. Shapiro of the Manhattan law firm of Shapiro Arato Bach. He likely won’t file the actual appeal until the fall and has asked to remain incarcerated at Brooklyn’s Metropolitan Detention Center, where I interviewed him on May 7, in the interim. There’s also the possibility that he is relocated to a prison in California, which would require a handcuffed, very languid, cross-country bus ride with other inmates, which is commonly known as “diesel therapy.” (Yuck.)I don’t know what Sam will argue in his appeal papers, but during my visit with him in the MDC, I got the sense that Sam has become increasingly obsessed with Sullivan & Cromwell, the prestigious Wall Street law firm that represented FTX on regulatory and other matters before the company’s November 2022 bankruptcy filing and, somewhat unusually, continues to represent FTX during the bankruptcy process as well.

Typical bankruptcy protocol prohibits a pre-petition legal or financial advisor from also being a post-petition advisor on account of potential conflicts. Nevertheless, after S&C advised Sam to turn over the C.E.O. job to restructuring expert John J. Ray III, which he did, Ray hired the law firm as FTX’s principal legal advisor. Sam told me that he believed there very well might have been a different outcome had he not given up the C.E.O. job. As he has said repeatedly, he was in the midst of trying to solve FTX’s “liquidity problem” by raising new capital and believes he would have succeeded.Of course, a capital infusion into FTX in November 2022 wouldn’t have changed the underlying facts of the case, in which Sam was convicted of siphoning $8 billion of customer money into his personal hedge fund. But it might have reduced customer losses, which factored into his sentencing. Anyway, in an effort to figure out what is likely to be Sam’s argument on appeal, I dug through the various public filings in court records in search of clues…

The Friedberg Sitch

To that end, I came across the January 19, 2023, declaration of Daniel Friedberg, a former attorney at Fenwick & West and the former chief compliance officer at one FTX subsidiary and the former chief regulatory officer at another FTX subsidiary. He also represented Alameda Research and FTX International when he was at Fenwick. In 2020, at the urging of Joe Bankman, Sam’s father, Friedberg left Fenwick to go work for Sam. (He has been described as a consigliere type to Sam.)Friedberg’s declaration was filed (late) with the bankruptcy court in opposition to the hiring of S&C as the debtor’s counsel. Admittedly, Friedberg is not the most objective source. As he conceded in his affidavit, he transferred 25 Bitcoins (now worth around $1.7 million) to the FTX.US exchange and relied on the fact that they would not be transferred to Alameda, Sam’s hedge fund. He also owned about $400,000 worth of Solana, another cryptocurrency. At the time of the affidavit, he wrote that he was locked out of the FTX.US exchange and couldn’t get his hands on his crypto. So in addition to being a former employee, he is also a peeved creditor. Prior to joining FTX, Friedberg also served as an attorney for UltimateBet, which later failed and became one of the largest online gambling scandals ever. Also, a June 2023 civil lawsuit that the debtors filed against Friedberg claimed that he was S.B.F.’s “fixer” and aided and abetted him. He was also accused of receiving millions of dollars in unwarranted bonuses from FTX. A source close to the FTX fiasco, though, told me that Friedberg is a “very moral person” but conceded that “no one is a completely reliable source” in this ecosystem.

In any event, in his January 2023 declaration, Friedberg recounted a sort of convoluted story that may or may not shed light on Sam’s potential appeal argument. In 2021, Brett Harrison, the former president of FTX.US, wanted to hire a guy named Ryne Miller as general counsel to FTX.US, Alameda, and FTX International. Miller had been a partner at S&C and had also worked at the Commodity Futures Trading Commission. After his hiring, according to Friedberg, Miller asked him if he could hire S&C as outside counsel. Friedberg claimed that Miller told him it was “important” to give S&C “a lot of business” because he wanted to return to S&C after his stint at FTX was over.On November 7, 2023, as the shit was hitting the fan at FTX, Friedberg happened to be in New York at the FTX.US office. In his declaration, he said that was the first time he ever heard about the missing $8 billion in funds. He went to see Miller to tell him what was happening, but Miller said he was already aware of the situation and was busy contacting “all the billionaires that he knew” to try to raise new financing for the company. Concerned that trying to raise new funds in the midst of an ostensible massive financial scandal was “unethical,” Friedberg resigned from the company on November 8. He said he warned Miller to be careful. In his final conversation with Miller before leaving FTX, and after Sam’s effort to sell FTX to Binance failed, Friedberg said that he informed the general counsel that various bankruptcy attorneys he consulted told him the (then-inevitable) bankruptcy filings of FTX International and Alameda should occur outside the U.S., either in Europe or the Bahamas. He wrote that Miller disagreed, and suggested that this was because Miller wanted S&C to get the lucrative assignment of representing FTX in bankruptcy. Friedberg also claimed he told Miller that FTX.US did not need to file for bankruptcy because it appeared to be solvent and that it had $200 million of cash on its balance sheet. Friedberg conveyed a considerable back-and-forth here over their apparent disagreement. Anyway, in the end, Miller went with Sullivan & Cromwell, and harsh words were allegedly exchanged. In his declaration, Friedberg also described some additional run-ins he had with S&C, as counsel to the debtor, including his belief that they muzzled him from speaking to regulators. He also listed reasons why he believed S&C should be disqualified from representing the debtor, post-petition, including work it did for Alameda when it was making a “credit bid” for Voyager, another crypto exchange that went bankrupt. He also did not think FTX.US should have filed for bankruptcy because it was still solvent, even though an exacerbating bank run appeared likely to reverse that position. At a bankruptcy court hearing on January 20, 2023, Friedberg’s declaration came up. James Bromley, a partner at S&C, thought it should be “stricken from the record.” Marshal Hoda, an attorney representing two creditors who objected to the hiring of S&C as the debtor’s counsel, said that the allegations about S&C in Friedberg’s declaration were “as relevant as they are explosive.” But Judge John Dorsey, in Delaware, said that Friedberg’s declaration was “procedurally … not appropriate” and that he had read it and found it “full of hearsay, innuendo, speculation, rumors; certainly not something I would allow to be introduced into evidence.” At the same hearing, Bromley also defended S&C’s post-petition hiring. “I have been debtor’s counsel in multiple cases over 30 years,” he said. “I have never been debtor’s counsel in a situation where my firm did not have an existing, pre-existing relationship with the debtors. So, the mere fact that Sullivan & Cromwell had done work is irrelevant. The question is whether or not any of that work goes to any of the issues that we’re facing and if so, how would it go to those issues. Is there anything about the work that we have done in the past or the relationships that we have that would be disqualifying, and the answer to that is no.” I reached out to Friedberg by email to see if he would elaborate on his allegations, but he did not respond. Paul Holmes, a spokesman for S&C, directed me to the civil lawsuit that the debtor filed against Friedberg, presumably as evidence of Friedberg’s role in what happened at FTX. Miller, who now is the managing partner of Miller Strategic Partners, a boutique law firm in New York City, did not return to Sullivan & Cromwell. Someone familiar with how Miller reacted to Friedberg’s declaration told me that Miller was “wildly disappointed” with its contents, which he thought “ranged from false to completely fabricated to not true.” One of the most bizarre elements of this endlessly bizarre case is that it all coalesced around a bunch of young people, with little life experience, often apparently skating around the laws or simply blithely ignoring them. As the person close to the crisis noted to me, no one here has a ton of credibility at this point. Indeed, S&C’s fee applications, as filed with the bankruptcy court, indicate that the law firm turned what was around a $20 million a year assignment advising FTX on U.S. regulatory matters and a couple of M&A assignments to a fee bonanza in bankruptcy of around $180 million so far, and counting, for work, admittedly, that will likely yield repayments to customers and creditors of 100 cents on the dollar plus interest, if the recently filed plan of reorganization is approved. Nevertheless, the saga of FTX is far from over, at least for Sam, who has come to expect a certain amount of attention and seems happy to share his views. And as he continues to work with his lawyer and his parents on his appeal, during their daily hourlong legal strategy calls while cooped up in MDC, one wonders if his gripes against S&C are little more than a continuation of Friedberg’s and might not get him as far as he hopes they will.

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