Headline: Sullivan & Cromwell admits AI “hallucinations” in bankruptcy filing tied to alleged crypto scam network
Sullivan & Cromwell has told a federal bankruptcy judge that one of its recent filings in a high‑stakes Chapter 15 fight contained errors produced by generative AI — including fabricated case citations and misstated authorities — in a case seeking to recover billions of dollars in cryptocurrency allegedly tied to the Prince Group and its owner, Chen Zhi.
What happened
- In a letter to Judge Martin Glenn of the U.S. Bankruptcy Court for the Southern District of New York, Andrew Dietderich, S&C’s head of restructuring, said the firm “deeply regret[s]” that an April 9 motion contained AI “hallucinations” that created fictitious authorities and distorted real ones. The firm represents court‑appointed liquidators from the British Virgin Islands pursuing claims in Chapter 15 proceedings.
- S&C withdrew the original motion and filed a corrected version after opposing counsel — lawyers for Prince Group and Chen at Boies Schiller Flexner — flagged the problems. The defendants say at least 28 citations were erroneous, including quotations that do not exist, and that some cited cases were from different circuits than indicated.
- The firm acknowledged its AI‑use rules were not followed during preparation. S&C said its policy requires lawyers to complete training before using generative AI tools and to “trust nothing and verify everything,” warning that failure to do so violates firm policy. A broader review turned up additional minor drafting issues the firm attributed to human error.
Case context: crypto recovery and alleged scam network
- The litigation centers on efforts by BVI liquidators, via Chapter 15 recognition in the U.S., to pursue claims tied to Prince Group and Chen Zhi. U.S. prosecutors allege Chen directed scam compounds that targeted victims worldwide and have sought to seize billions in cryptocurrency they say is linked to the alleged fraud. Chen was detained earlier this year in Cambodia and later returned to China.
- Prince Group — incorporated in the British Virgin Islands — has been linked by U.S. authorities to large‑scale fraud operations in Southeast Asia and has been sanctioned by both U.K. and U.S. governments. The Chapter 15 proceedings are aimed at giving the liquidators authority to act on behalf of creditors and alleged victims in the U.S.
Legal fallout and industry implications
- Opposing counsel argue the timing of S&C’s correction prejudiced the defendants because the revised filing arrived after they filed objections; they asked the court to adjourn a hearing and hold a status conference.
- The episode highlights growing legal and operational risks as law firms experiment with AI in high‑stakes litigation, particularly in complex crypto asset recovery matters where accuracy of authority and timing are critical.
- Courts globally have started to react: judges have sanctioned or criticized lawyers for AI‑generated fabrications; in Australia a lawyer lost the ability to practise as a principal after AI‑related errors. Law schools are adding instruction on generative tools, and courts are already weighing how AI interacts with rules on privilege and process — even as some courts pilot AI to manage heavy caseloads.
Why this matters for crypto readers
- Recovering crypto tied to alleged scams depends on airtight legal work and credible documentation. AI can speed research and drafting, but this incident shows that unchecked outputs can undercut litigation strategies, create delay, and expose firms and clients to reputational and procedural risks.
- For victims, liquidators and prosecutors seeking billions in crypto, precision in filings isn’t just academic — it materially affects the pace and success of recovery efforts.
S&C did not identify the individual lawyers who prepared the original motion. The court will now decide whether to reschedule proceedings and how to address any prejudice claimed by defendants.
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