A federal appeals court has ordered the appointment of an independent examiner in the bankruptcy case of FTX amid concerns about widespread fraud preceding the collapse of the multibillion-dollar cryptocurrency exchange.
A three-judge panel in Philadelphia issued the ruling Friday in an appeal filed by the U.S. bankruptcy trustee, who serves as a government watchdog in Chapter 11 reorganizations. Lawyers for the trustee had argued that FTX’s financial affairs and business operations, including allegations of unprecedented fraud leading to its collapse, should be reviewed by a disinterested person, not left to an internal investigation.
U.S. Bankruptcy Judge John Dorsey denied the trustee’s request last February. He agreed with FTX and its official committee of unsecured creditors that an examiner’s work would be too costly and would duplicate investigations already under way by FTX’s new leadership, the creditors committee and several federal agencies. Dorsey also expressed confidence in John Ray III, who was appointed by FTX co-founder Sam Bankman-Fried as the company’s new CEO on the same day the company sought bankruptcy protection.
Bankman-Fried is awaiting sentencing in March after being convicted in November on wire-fraud and conspiracy charges. Several other former FTX executives have pleaded guilty to similar charges. Prosecutors said Bankman-Fried siphoned billions of dollars from customer accounts at FTX into his cryptocurrency hedge fund, Alameda Research.
The appeals court reversed Dorsey’s ruling, agreeing with the trustee that the bankruptcy code mandates the appointment of an examiner.
“Sometimes highly complex cases give rise to straightforward issues on appeal,” Judge Luis Felipe Restrepo wrote for the panel. “Such is the case here.”
Restrepo also noted that an examiner is required to make his or her findings public, whereas a debtor or creditors committee conducting an internal investigation has no such obligation.
“The collapse of FTX caused catastrophic losses for its worldwide investors but also raised implications for the evolving and volatile cryptocurrency industry,” the judge wrote, noting that further scrutiny of FTX could alert potential investors to undisclosed credit risks in other cryptocurrency companies.
“In addition to providing much-needed elucidation, the investigation and examiner’s report ensure that the bankruptcy court will have the opportunity to consider the greater public interest when approving the FTX Group’s reorganization plan,” he added.