Appeals court reverses judge’s ruling, orders appointment of independent examiner in FTX bankruptcy
DOVER, Del. — A federal appeals court has ordered the appointment of an independent investigator in FTX’s bankruptcy case over concerns of widespread fraud before the collapse of the multi-billion dollar cryptocurrency exchange.
A three-judge panel in Philadelphia issued the ruling on Friday in an appeal filed by the U.S. trustee, which serves as the government’s watchdog in Chapter 11 reorganizations. Lawyers for the trustee had argued that FTX’s financial affairs and business operations, including allegations of unprecedented fraud that led to its collapse, should be reviewed by a disinterested individual and not left to an internal investigation.
U.S. Bankruptcy Judge John Dorsey denied the trustee’s request last February. He agreed with the FTX and its official committee of unsecured creditors that an investigator’s work would be too expensive and would duplicate investigations already underway by FTX’s new leadership, the committee of creditors and several federal agencies. Dorsey also expressed confidence in John Ray III, who was appointed by FTX co-founder Sam Bankman-Fried as the company’s new CEO on the same day the company sought bankruptcy protection.
Bankman-Fried is awaiting sentencing in March after being convicted of fraud and conspiracy in November. Several other former FTX executives have pleaded guilty to similar charges. Prosecutors said Bankman-Fried siphoned billions of dollars from customer accounts at FTX into his cryptocurrency hedge fund, Alameda Research.
The appeals court reversed Dorsey’s ruling and agreed with the trustee that the bankruptcy law requires the appointment of an examiner.
“Sometimes very complex cases lead to simple issues on appeal,” Judge Luis Felipe Restrepo wrote for the panel. “That is the case here.”
Furthermore, Restrepo notes that an investigator is obligated to make his or her findings public, while a debtors or creditors committee conducting an internal investigation has no such obligation.
“The collapse of FTX caused catastrophic losses to its global investors, but also carried implications for the evolving and volatile cryptocurrency industry,” the judge wrote, noting that further investigation of FTX could alert potential investors to undisclosed credit risks in other cryptocurrency companies.
“In addition to providing much-needed clarification, the investigation and investigative report ensure that the bankruptcy court has an opportunity to consider the larger public interest in approving FTX Group’s reorganization plan,” he added.