US government says FTX’s new CEO needs oversight
The U.S. Trustee overseeing FTX’s colossal bankruptcy case is asking a Delaware judge to appoint another layer of oversight for the company’s new management team.
Juliet Sarkessian, an attorney for the Department of Justice’s U.S. Trustee Program providing oversight on the case, argued in court Monday that an examiner must be appointed to investigate the facts and circumstances before and after FTX’s bankruptcy filing in November of last year.
“Mr. Ray was appointed by Mr. Sam Bankman-Fried,” Sarkessian told the judge about the company's new CEO John J. Ray III, who is not required to file a public report on his findings. “He is not independent – not like an examiner.”
An examiner, Sarkessian argued, would be better suited than the company’s current management to look into illegal transfers of funds, including more than $400 million that its current managers say was withdrawn from FTX’s coffers before they gained control of company assets.
An examiner, she said, could not only investigate the use and misuse of customer funds, but also what FTX’s entities and employees knew or should have known about that misuse, and whether any former employees involved in misuse are still serving in roles within the company.
“Who turned a blind eye?” Sarkessian asked. “Who was responsible for preventing the hacks? Whether they were negligent?”
The Texas State Securities Board and more than a dozen other U.S. state agencies have supported the U.S. government’s motion.
FTX contested the Trustee’s request, arguing that under Mr. Ray — who also testified during the hearing — the company and the government have already begun investigations to recover company and customer assets.
Ray, who previously managed energy giant Enron’s outsized Chapter 11 bankruptcy, testified during the proceedings that he is independent of the company’s prior management and that his team helped stop more crypto from being stolen.
“Immediately on the filing, we had an issue of crypto being stolen,” Ray said, describing the corporate environment that he took over as “pure hell” and lacking in integrity. “The hacks went on virtually all night long…we had over 100 people on the phone…you have no passwords…you don’t know where the wallets are.”
Ray also told the Trustee he charged FTX $690,000 from his appointment on November 11 to the end of the year. Previous court documents show Ray bills $1,300 per hour for his services.
FTX attorney James Bromley said more assets would have been lost if not for Ray and his round-the-clock efforts. Bromley also told the judge that an examiner could extend the duration of the bankruptcy proceedings for “months, if not years.”
“Who bears that cost?” he asked. “The creditors.”
To investigate FTX, Judge John T. Dorsey also noted that an examiner would need to hire its own experts, including financial, cybersecurity, and crypto advisors.
"It's going to be in the tens of millions, if not hundreds of millions of dollars to do that investigation.” he said.
The Joint Provisional Liquidators and counsel for FTX were in agreement that creditors would bear the brunt of the cost of an examiner.
“It's simply going to be a duplication of effort and an enormous amount of expense,” Bromley argued.
FTX has $5.5 billion in liquid assets, including $1.2 billion in cash, but Bromley reiterated that the sum doesn't cover the shortfall of what's owed to creditors. He said the examiner motion was a waste of the company's resources for the “pure purpose of public policy.”
The judge chose not to rule on the motion Monday. He will give all parties time to convene privately, putting the matter "under advisement" for the time being.
The next hearing for the bankruptcy of FTX (Case No. 22-11068), which will include a status update on the examiner motion, is set for Wednesday, Feb. 8.
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