FTX Cryptocurrency Exchange to be Investigated by Independent Bankruptcy Examiner
In a significant development, a federal appeals court has ordered the appointment of an independent bankruptcy examiner to investigate the collapse of FTX, the cryptocurrency exchange formerly led by Sam Bankman-Fried. The 3rd U.S. Circuit Court of Appeals in Philadelphia reversed a lower ruling and agreed with a government watchdog that appointing an examiner was mandatory under the U.S. Bankruptcy Code due to the large size of FTX’s case and the alleged misappropriation of $10 billion of customer assets.
The court emphasized that appointing an examiner aligns with Congress’s intention to protect debtors and creditors in cases of great public interest, such as FTX’s Chapter 11 reorganization. The collapse of FTX not only caused catastrophic losses for investors worldwide but also raised implications for the evolving and volatile cryptocurrency industry, according to Circuit Judge L. Felipe Restrepo.
The U.S. Trustee, a Department of Justice bankruptcy watchdog, argued that an examiner should investigate fraud and mismanagement that occurred at FTX before its collapse. They deemed it too important to be left solely to creditors and current management. However, John Ray, who replaced Bankman-Fried as chief executive, and a committee of unsecured FTX creditors opposed the appointment of an examiner, citing duplication of efforts and excessive costs.
The decision by the appeals court overturns a previous ruling by U.S. Bankruptcy Judge John Dorsey, who agreed with FTX’s argument that a probe could cost over $100 million. Lawyers for FTX and the creditors’ committee have not yet commented on the decision, and the Justice Department has not responded to requests for comment.
It is worth noting that John Ray has prior experience managing Enron after the energy trader’s bankruptcy in 2001. Meanwhile, Sam Bankman-Fried was convicted on all seven fraud and conspiracy counts he faced, with prosecutors accusing him of looting billions of dollars from FTX customers to support his Alameda hedge fund. Bankman-Fried’s sentencing is scheduled for March 28, and he plans to appeal his conviction.
The case, officially known as In re: FTX Trading Ltd, will now be investigated by an independent bankruptcy examiner as ordered by the 3rd U.S. Circuit Court of Appeals.
By Jonathan Stempel
