Justice Department Appeal Seeks Independent FTX Investigation, Despite $100M Price Tag

·2 min read
Justice Department Appeal Seeks Independent FTX Investigation, Despite $100M Price Tag
Justice Department Appeal Seeks Independent FTX Investigation, Despite $100M Price Tag

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The U.S. Department of Justice has appealed a decision by the FTX bankruptcy judge not to appoint an independent examiner to investigate the exchange's collapse.

On Feb. 15, Federal Judge John Dorsey turned down a request by the U.S. trustee appointed to represent the public in the case, citing estimates that the investigation could cost as much as $100 million.

Saying that an examiner "would not be in the best interest of the creditors," Judge Dorsey noted:

Once the second-largest crypto exchange, FTX collapsed in November. It was subsequently revealed that some $10 billion of FTX customers' funds had been illegally given to a sister company, private trading firm, Alameda Research. Some $8 billion appears to have been stolen, spent or lost.

Three of the companies' top executives have pleaded guilty to fraud and are set to testify against founder and CEO Sam Bankman-Fried. He is charged with multiple counts of fraud, conspiracy, and anti-money laundering (AML) and campaign finance violations.

Calling for "a full and independent investigation into all persons and entities that may have been involved in any malfeasance, negligence or other actionable conduct," trustee Andrew Vara said that was "especially important because of the wider implications that FTX's collapse may have for the crypto industry."

Given the size of the bankruptcy, it is also mandatory under federal law, Vara said in December.

Judge Dorsey disagreed, siding with FTX's current management as well as the Committee of Unsecured Creditors, who called it wasteful and duplicative of the work being done by the current management.

The judge also accepted an argument opponents put forward arguing that another investigation would bring "increased risk of further loss through inadvertent disclosures or hacking" — like the $432 million theft just as the new management was taking over.

Aside from arguing that the size of the bankruptcy required an independent examiner, the trustee pointed out that the management had a fiduciary duty to the creditors, whose interest might not align with that of "other interested parties" — among them several senators who have called for such an investigation.

"The questions at stake here are simply too large and too important to be left to an internal investigation," the trustee said. "An examination is preferable to an internal investigation under the facts of these cases because the findings and conclusions of the examination will be public and transparent."

That perspective is borne out by the findings of a damning report by an independent examiner who investigated the collapse of crypto lender Celsius. That report accused the firm of using "Ponzi-like" tactics and manipulating the price of its CEL token to allow founders to sell their holdings at a big profit.