DOJ Seeks Independent Examiner in FTX Fraud Allegations

Sam Bankman-Fried, former CEO of FTX cryptocurrency exchange
Former FTX CEO Sam Bankman-Fried.

Alex Wong / Getty Images

The Department of Justice's Office of the U.S. Trustee filed a motion with the Delaware Bankruptcy Court seeking the appointment of an independent examiner to investigate potential wrongdoing in the collapse of crypto exchange FTX.

Key Takeaways

  • DOJ wants FTX investigated for fraud.
  • The SEC has launched a parallel civil probe into what the exchange told investors.
  • The questions at stake are "too large, and too important" to be left to an internal investigation.

Too Important for Internal Investigation

"Like the bankruptcy cases of Lehman, Washington Mutual Bank, and New Century Financial before them, these cases are exactly the kind of cases that require the appointment of an independent fiduciary to investigate and to report on the Debtors’ extraordinary collapse," U.S. Trustee Andrew R. Vara said in the filing.

The examiner should "investigate the substantial and serious allegations of fraud, dishonesty, incompetence, misconduct, and mismanagement by the Debtors," Vara said in the filing.

He said that he doesn't question the qualifications, competence, or good faith of newly appointed CEO John J. Ray, in his role as a fiduciary for the Debtors’ estates, the questions at stake are "too large, and too important" to be left to an internal investigation.

An examination is preferable to an investigation because the former can be made public, which "is especially important because of the wider implications that FTX’s collapse may have for the crypto industry," Vara said in the filing.

SEC Launches Parallel Probe

A parallel civil probe into the collapse of FTX is being conducted by attorneys from the U.S. Securities and Exchange Commission's enforcement division. Similar inquiries were sent to companies that traded or invested on the crypto platform, according to people familiar with the inquiries. While authorities haven’t accused anyone of wrongdoing, they are examining what the company and its leaders told investors and customers as the exchange imploded last month.

Former CEO Sam Bankman-Fried used $10 billion in customer funds to prop up his trading business, and at least $1 billion of those deposits have gone missing. In court filings, FTX's new CEO Ray said the company had concealed the misappropriation of corporate funds, including staff purchases in the Bahamas.

The Bottom Line

FTX's failure is one of the biggest crypto-related failures. The event triggered a cryptocurrency rout that caused billions of dollars to be lost by an estimated 1 million creditors. As more and more information comes to light in the case, the call is even stronger for regulators to step up and prevent incidents like this from happening again.

Article Sources
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  1. UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE. “Case 22-11068-JTD Doc 176 Filed 12/01/22

  2. UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE. “Case 22-11068-JTD Doc 176 Filed 12/01/22

  3. Bloomberg: “FTX Investors Are Squeezed by US for Information on Firm and Bankman-Fried

  4. Reuters. “FTX was run as 'personal fiefdom,' faces hacks, missing assets, attorneys say

  5. Reuters. “After FTX collapse, pressure builds for tougher crypto rules

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