The United States Department of Justice (DOJ) is seeking an independent examination of the collapse of Bahamas-headquartered FTX, according to a recent court filing.
The crypto giant, which was co-founded by Sam Bankman-Fried, filed for bankruptcy last month after experiencing a liquidity crisis.
In a court filing on Thursday, DOJ Trustee Andrew Vara said, “Like the bankruptcy cases of Lehman, Washington Mutual Bank, and New Century Financial before them, 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.
“The appointment of an independent examiner would be in the interests of the debtors’ creditors and other parties in interest in the debtors’ estates, consistent with Code section 1104(c)(1).
“An examiner could—and should—investigate the substantial and serious allegations of fraud, dishonesty, incompetence, misconduct, and mismanagement by the debtors, the circumstances surrounding the debtors’ collapse, the apparent conversion of exchange customers’ property, and whether colorable claims and causes of action exist to remedy losses.”
Vara said the appointment of an examiner is mandatory because the debtors’ fixed, liquidated, unsecured debts to its customers alone “far exceed” a $5 million threshold.
He said an examination is preferable to an internal investigation because the findings and conclusions will be public and transparent “which is especially important because of the wider implications that FTX’s collapse may have for the crypto industry”.
“(New FTX CEO) Mr. [John J.] Ray and FTX’s new management have done valuable preliminary work in untangling some of these issues, but the questions at stake here are simply too large and too important to be left to an internal investigation,” Vara said.
“Although the US Trustee does not question the qualifications, competence, or good faith of Mr. Ray, his role in these cases is that of a fiduciary for the debtors’ estates with objectives that may not necessarily be aligned with those of all other interested parties.
“By contrast, because an examiner would be able to act as a true neutral as to all affected parties, an examiner’s findings likely would enjoy broader acceptance and credibility than an examination conducted by any stakeholder in these cases.
“An examiner may also allow for a faster and more cost-effective resolution of these cases by allowing Mr. Ray to focus on his primary duty of stabilizing the debtors’ businesses while allowing the examiner to investigate the debtors’ collapse and prior management.”
Vara pointed to FTX’s collapse early last month, noting that he began with reports of “significant problems” with one debtor’s balance sheet. That debtor was Alameda Research.
He said the debtors suffered “a virtually unprecedented” decline in value — from a market high of $32 billion earlier this year — and “a severe liquidity crisis after a proverbial ‘run on the bank’ amid revelations of multiple corporate failures and misuse of customer funds facilitated by ‘software to conceal’ it”.
“The result is what is likely the fastest big corporate failure in American history, resulting in these ‘free fall’ bankruptcy cases,” Vara said.
“Debtors’ approximately one million worldwide creditors, outside investors, and regulators are demanding answers to what happened and how.”
Binance CEO Changpeng Zhao, who heads the world’s largest crypto exchange, tweeted last month that he was pulling out of FTX due to recent revelations that came to light.
Questions began circulating in early November over whether FTX improperly used customer funds to prop up Alameda Research, a hedge fund owned by Bankman-Fried.
Officials said the impact of Zhao’s announcement was swift and more than $5 billion of withdrawal requests were made to FTX.
FTX was unable to process the requests because it did not have the money.
Officials have said in court documents that there is evidence of fraud and mismanagement at FTX. FTX has over 100 companies in over 20 countries.
It lost between $10 billion and $50 billion, court documents show.
