Independent Examiner Too Expensive, Rules FTX Crypto Judge

Firms working on the FTX bankruptcy case have already billed tens of millions of dollars.

That could be why federal bankruptcy Judge John Dorsey on Wednesday (Feb. 15) rejected a request from the U.S. Trustee, a federal watchdog tasked with monitoring corporate bankruptcies, for the appointment of an independent examiner to oversee the FTX bankruptcy case.

In a 50-minute court hearing the judge described as being “much shorter” than he anticipated, Dorsey said there was “no question” that if an examiner were appointed, the cost “would be in the tens of millions of dollars and would likely exceed 100 million.”

This comes as white shoe law firm Sullivan & Cromwell (S&C), which is representing FTX and assisting the new leadership, has already billed $7.5 million for just 2½ weeks of work last November, per documents filed with the court.

The firm said over 6,500 hours were worked by its team of partners, associates and administrative staff, and that the amount billed represents a 20% discount on what would have been a $9.5 million total.

Every Dollar Spent Represents a Dollar Lost

The appointment of an examiner would lead to exponential costs to the estate, which would have to be borne by the FTX group of creditors.

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

“Given the facts and circumstances of this highly unique case, an appointment would not be in the best interest of the creditors, requiring them to bear the burden of yet another investigation does not help with the end goal of maximizing the returns for the creditors, who will likely already not come close to recouping their losses,” the judge said.

Dorsey separately cited current FTX CEO John J. Ray’s restructuring expertise, experience and judgment as a factor behind his ruling that a duplication of oversight efforts was not needed.

The U.S. Trustee made arguments positing that the appointment of an examiner was necessary to scrutinize the use of software to conceal the alleged misuse of customer funds by FTX.

Wednesday’s FTX decision comes after a lengthy report released Jan. 31 by the independent examiner appointed to oversee the bankruptcy proceedings of Celsius, another failed crypto firm, made headlines for its strongly worded dressing down of the company and its CEO Alex Mashinsky.

Bipartisan Letter From US Senators

Dorsey’s ruling also comes as a blow to Sens. John Hickenlooper, D-Colo., Thom Tillis, R-N.C., Elizabeth Warren, D-Mass., and Cynthia Lummis, R-Wyo., who together sent a letter to the FTX judge in January that called for an independent examiner to be appointed.

The senators’ collectively noted that law firm S&C, “advised FTX for years leading up to its collapse and one of its partners even served as FTX’s general counsel. … As legal counsel is often central to major financial scandals, given their role in drafting financial agreements, risk management compliance practices, and corporate controls, it is perfectly reasonable to have concerns about the impartiality and manner that Sullivan & Cromwell will approach any investigation of FTX with.”

The lawmakers’ letter represented an “inappropriate ex parte communication,” Dorsey said during a January hearing, adding that it would have no impact on his decision.

Bankman-Fried has also repeatedly taken aim at S&C, alleging the law firm rushed his former company into its bankruptcy proceedings and remained primarily motivated by “chasing fees.”

A representative for Sullivan & Crowell did not immediately reply to PYMNTS’ request for comment.

This Week in Court

As reported earlier by PYMNTS, Bankman-Fried is facing separate scrutiny in his own criminal case for inappropriate use of a virtual private network (VPN) to access the internet.

His lawyer claims the disgraced founder merely wanted to watch the Super Bowl using his international Bahamas log in.

The government fears the disgraced entrepreneur could be using the privacy tool to improperly access foreign crypto sites, contact potential witnesses, or undertake other actions restricted by his bail terms without being tracked.

Separately, leading investment funds Sequoia Capital, Thoma Bravo and Paradigm are among the firms being named in a new class-action lawsuit alleging the FTX investors improperly added “an air of legitimacy” to a business that the Securities and Exchange Commission has since described as a “fraudulent house of cards.”