DOJ seeks independent probe into FTX bankruptcy following allegations against Sam Bankman-Fried

The bankruptcy watchdog of the US Department of Justice has called for an independent investigation into the collapse of cryptocurrency exchange FTX.

The office said clients need a neutral party to investigate allegations of “fraud, dishonesty, incompetence, misconduct and mismanagement” allegedly made by disgraced founder Sam Bankman-Fried and other managers.

Bankman-Fried has admitted that it failed to adequately manage “risks” at the $32 billion cryptocurrency trading firm, which faces accusations of funneling $10 million to the founder’s other crypto company, Alameda Research, run by his ex-girlfriend.

The company is already under investigation by the Justice Department, the Securities and Exchange Commission and the Commodity Futures Trading Commission, and its collapse is being overseen by new CEO John Ray, who oversaw Enron’s fall.

While Ray said he has opened an internal investigation into FTX’s failures, the DOJ has asked a Delaware bankruptcy court to appoint an independent investigator who will release a public report on the collapse.

US trustee Andrew Vara, who serves as the official overseeing bankruptcy courts for the Department of Justice, called for an independent investigation due to the massive scale of the FTX collapse and its impact on crypto markets.

“The questions at stake here are simply too big and important to be left to an internal investigation,” Vara wrote. ‘[It] it’s probably the fastest big corporate failure in US history.’

Ray, who was hired to guide the company through bankruptcy, said investigating the FTX implosion and recovering client assets are among his top priorities.

Ray has said that the oversight, security and corporate governance failures he identified were greater than in any process he has handled in his 40 years as a bankruptcy specialist.

His words spoke volumes, as he was the man appointed to deal with the infamous 2001 collapse of energy giant Enron.

The Justice Department’s US Trustee’s Office said in a court filing that while it did not question Ray’s competence or seriousness, an independent investigation would carry more weight among FTX customers and allow Ray to devote more energy to stabilize FTX operations.

Examiners are often appointed during large and problematic bankruptcy filings, such as the collapse of investment banking company Lehman Brothers in 2008, where an independent investigation released a detailed report on the failures.

A neutral examiner would also provide more public and transparent findings than an internal review, the US Trustee wrote, which is “especially important given the broader implications that the FTX collapse may have for the crypto industry,” Vara added. .

“These cases are exactly the type of cases that require the appointment of an independent trustee to investigate and report extraordinary debtor collapse,” Vara said.

Vara’s application will be reviewed by US Bankruptcy Court Judge John Dorsey.

FTX did not immediately respond to a request for comment.

FTX filed for bankruptcy in November after a week in which a potential merger with rival crypto exchange Binance fell through.

FTX founder Sam Bankman-Fried faced allegations that he had funneled customer deposits to FTX affiliate trading firm Alameda Research, with the exchange experiencing withdrawals of around $6 billion in just 72 hours.

Bankman-Fried has said it is “deeply sorry for what happened” and acknowledged a “massive failure to oversee risk management” but repeatedly claimed it did not intentionally mix FTX user deposits with Alameda’s trading activity. .

Speaking to Good Morning America from his $30 million penthouse in the Bahamas in an interview that aired Thursday morning, Bankman admitted that he “didn’t spend time” managing risk on his cryptocurrency exchange because he “got a little cocky.” “.

“I think there’s something even deeper wrong there, which is that I wasn’t even trying. Like I’m not spending time or effort trying to manage risk on FTX,” he told GMA.

‘I think I stopped working so hard for a while. You know, honestly, if I look back, I think I got a little smug, I mean more than a little bit and I think a part of me, you know, felt like we made it.

The 30-year-old also appeared to be trying to dodge questions about what he knew about the FTX funds being considered to pay off Alameda Research’s debts.

Bankman-Fried is currently under investigation by the Securities and Exchange Commission and the Commodity Futures Trading Commission over reports that it helped funnel $10 million from FTX to Alameda.

While the list of each company’s debts remains mostly anonymous, the bankruptcy filings revealed that Alameda owed more than $55,000 to Jimmy Buffet’s Margaritaville bar in the Bahamas.

When pressed by GMA’s George Stephanopoulos, Bankman-Fried denied that he knew anything about the alleged misuse of funds.

“So I can’t speak for who knows what,” the FTX founder said, noting that there was a provision at his company that allowed him to lend and borrow clients’ investments.

“I was vaguely aware that this was how some cables were sent in the first place,” he added of the initial transfers of funds from FTX to Alameda.

When asked about his company’s policy that explicitly states that investments would not be lent out, Bankman-Fried insisted there was a rule that superseded that policy, but he couldn’t remember it.

The FTX founder said if he was put under oath, he would ultimately say: “I didn’t know there was misuse of client funds.”

He added: “Look, I should have been aware of this and I feel very, very bad and sorry that I didn’t and a lot of people got hurt and that’s up to me,” Bankman-Fried said.

Bankman-Fried noted that he was not at all worried about spending time in jail and that “the world will judge me however it wants.”

“There are a lot of things that worry me right now,” he said. “I’m trying to focus on what I can do in the future to be useful and, you know, let whatever, you know, the regulatory and legal processes that are going on play out the way they will.”

The disgraced businessman noted that his fortune, valued at more than $20 billion over the summer, has now dwindled to just $100,000.