The Clearing House - Corporate Changes in Payment Practices - September 2023

Court Orders Independent Bankruptcy Examiner to Investigate FTX Collapse 

FTX

A federal appeals court has ordered an investigation into the collapse of bankrupt cryptocurrency exchange FTX

The court agreed with a government watchdog’s argument that appointing an independent bankruptcy examiner was necessary due to the alleged misappropriation of $10 billion of customer assets and the size of FTX’s case, Reuters reported Friday (Jan. 19). 

The appointment of an examiner reflects Congress’ commitment to safeguarding debtors and creditors in cases of great public interest, a three-judge panel determined, according to the report. 

The collapse of FTX has had far-reaching implications for the cryptocurrency industry, Circuit Judge L. Felipe Restrepo wrote in the court’s decision, per the report. 

The U.S. Trustee, a Department of Justice bankruptcy watchdog, contended that an independent examiner should investigate fraud and mismanagement that occurred at FTX prior to its collapse, the report said. They believed that this investigation was too crucial to be left solely to creditors and current management. 

“An examiner may also allow for a faster and more cost-effective resolution of these cases by allowing Mr. Ray [FTX CEO John J. Ray III] to focus on his primary duty of stabilizing the debtors’ businesses while allowing the examiner to investigate the debtor’s collapse and prior management,” U.S. Trustee Andrew R. Vera wrote in a December 2022 filing, as reported at the time by CPI, a PYMNTS Company. 

However, John Ray, who replaced FTX’s founder Sam Bankman-Fried as chief executive, and a committee of unsecured FTX creditors opposed the appointment of an examiner, per the report. They argued that a probe would duplicate their efforts, result in significant costs and reduce the amount of money available for distribution among creditors. 

The decision to appoint an examiner overturned a previous ruling by U.S. Bankruptcy Judge John Dorsey, who sided with FTX’s argument that the investigation could cost over $100 million, according to the report. 

“Every dollar spent is a dollar lost by the creditors,” Dorsey said during a February hearing, PYMNTS reported at the time. He added that the proposed independent investigation would be redundant to other investigations being carried out by FTX’s new management as well as law enforcement. 

FTX founder Bankman-Fried was convicted on seven fraud and conspiracy counts in November. Prosecutors accused him of looting billions of dollars from FTX customers. Bankman-Fried’s sentencing is scheduled for March 28, and he is expected to appeal his conviction, per the report. 

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