FTX Objects Independent Investigation

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FTX opposes independent bankruptcy investigation, citing cost and cybersecurity concerns, according to a recent report by Reuters.

FTX’s legal team made a powerful plea to a Delaware U.S. bankruptcy judge on Monday to reject a court-supervised investigation into the crypto exchange’s collapse. The attorneys argued that such a probe would be both a waste of resources and a potential security hazard.

During Monday’s hearing, FTX attorney James Bromley told U.S. Bankruptcy Judge John Dorsey, who is overseeing the firm’s Chapter 11 case, that the proposed independent investigation on FTX requested by the U.S. Department of Justice’s bankruptcy watchdog was “too vague.”

The U.S. Trustee had requested that Judge Dorsey appoint an independent examiner to investigate allegations of fraud, misconduct, and mismanagement. He stated that these issues were “too important” to be left out of the probe. However, FTX’s position was in opposition.

On the other hand, Juliet Sarkessian, an attorney for the U.S. Trustee, argued that an investigation of this nature was mandatory under federal law in large bankruptcy cases if requested by the DOJ or a creditor.

Judge Dorsey stated that he believed an examiner was not necessary. Still, he asked the U.S Trustee to attempt to reach an agreement on the potential scope of an examiner review.

John Ray’s Statement

FTX’s newly appointed CEO, John Ray, also addressed the court on Monday. He pointed out that the firm had already responded to 156 requests for information from federal prosecutors in Manhattan, providing 70,000 documents, as well as hundreds of requests from other regulators, prosecutors, members of Congress, and foreign governments.

Ray, who previously led Enron Corp and Residential Capital through bankruptcy with court-appointed examiners, informed the court that those probes cost $90 million and $100 million, respectively, but were not beneficial. He described the reports generated by the Enron examiner as “shallow.”

Furthermore, Ray stated that the FTX database was too sensitive. He also said that he was hesitant to grant additional outside access due to cybersecurity risks faced at the start of FTX’s bankruptcy. 

In other news, Ray has recently been subject to criticism regarding his stated income in the first weeks as CEO. 

FTX filed for bankruptcy in November, leaving approximately 9 million customers and investors facing billions of dollars in losses. FTX’s founder Sam Bankman-Fried, who has been accused of using billions of dollars from FTX customers to pay off debts incurred by his Alameda Research hedge fund, has pleaded not guilty to fraud charges. However, several former top executives, including Alameda’s Caroline Ellison, have pleaded guilty to fraud.

FTX’s official creditors’ committee and the liquidators for its Bahamian company, FTX Digital Markets, both expressed support for FTX’s stance. They stated that the proposed investigation was redundant. Chris Shore, an attorney for the Bahamian liquidators, said that there is no need for investigation when some of the executives have already pleaded guilty.

On the contrary, state securities regulators in Texas, Vermont, and Wisconsin backed the Justice Department’s request. They believe that a neutral report would be of benefit to creditors and customers.

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