DOJ Watchdog Calls for Independent FTX Probe in Bankruptcy
A Justice Department official overseeing FTX’s bankruptcy said the crypto platform’s collapse is likely the ‘fastest big corporate failure in American history’
A U.S. Justice Department bankruptcy watchdog called for an independent investigation into FTX’s collapse, comparing the cryptocurrency platform’s sudden failure to the fall of Lehman Brothers.
U.S. Trustee Andrew Vara, an official at the Justice Department unit monitoring bankruptcy courts, asked the judge overseeing FTX’s chapter 11 case to appoint an independent examiner to provide a transparent account of FTX’s failure because of the wider implications the exchange’s collapse has on the crypto industry.
FTX’s collapse “is likely the fastest big corporate failure in American history,” Mr. Vara said, saying the platform suffered an astonishing loss in value from a market high of $32 billion earlier this year to bankruptcy.
Mr. Vara said an examiner is necessary to investigate “the substantial and serious allegations of fraud, dishonesty, incompetence, misconduct, and mismanagement” at FTX and circumstances around its collapse.
Mr. Vara also said an examiner should review whether any viable legal claims exist to remedy losses of FTX customers. He said reports produced by the examiner appointed in the bankruptcies of Lehman and subprime lender New Century Financial “stand as examples of the bankruptcy system serving the public interest in transparency and accountability.”
“These cases are exactly the kind of cases that require the appointment of an independent fiduciary to investigate and to report on the debtors’ extraordinary collapse,” Mr. Vara said.
FTX founder and former chief executive Sam Bankman-Fried said this week that he didn’t intend to commit any fraud or use customer funds to back leveraged bets at Alameda Research, a cryptocurrency hedge fund attached to FTX. Mr. Bankman-Fried also said he wants to assist government regulators in an attempt to make customers whole.
“We welcome the investigation by the examiner and hope the investigation encompasses not only the role of management, but all parties including the role of outside professionals,” Mr. Bankman-Fried’s spokesman said Thursday.
Mr. Vara’s request for an examiner must be approved by Judge John Dorsey of the U.S. Bankruptcy Court in Delaware.
Independent examiners are more common in large chapter 11 cases when borrowers or corporate insiders are accused of misconduct. A judge appointed an examiner for bankrupt crypto lender Celsius Network LLC in September, following a request by the U.S. Trustee.
Mr. Vara praised the work done so far by FTX’s new chief executive, John J. Ray III, and bankruptcy advisers to untangle the company’s affairs but said the “questions at stake here are simply too large and too important to be left to an internal investigation.”
An independent examiner could also benefit Mr. Ray by freeing him up to manage FTX’s operations while an investigation into prior management is conducted, he added.
FTX couldn’t immediately be reached for comment. Mr. Ray, who helped unwind Enron after the energy company filed for chapter 11, has said in court papers on behalf of FTX that he has never seen “such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here.”