The 3rd Circuit Court of Appeals in Philadelphia ruled Friday that FTX must be investigated by an independent investigator. The U.S. trustee overseeing FTX’s bankruptcy previously requested an investigation, but FTX’s current CEO objected and the Delaware bankruptcy judge overseeing the process rejected it.
On Friday, the decision was remanded. An investigation by current CEO John Ray III alone is not enough, and an independent investigation could shed new light on cryptocurrency industry practices, one of the appellate judges wrote in a precedent opinion.
Judge Luis Felipe Restrepo wrote that the examiner must not be an interested party or involved with the debtor. There are currently concerns that FTX employees who may have been involved in the fraud in connection with Ray’s investigation may still remain with the FTX Group, and FTX’s attorneys, Sullivan & Cromwell, were FTX’s pre-petition counsel.
Restrepo said bankruptcy law requires an examiner to be appointed if a debtor’s debt exceeds $5 million, which was the case for FTX. The judge said an independent investigation into FTX would benefit the cryptocurrency industry as a whole.
“For example, the investigation into FTX Group’s use of its own cryptocurrency token, FTT, to inflate the value of FTX and Alameda Research will further scrutinize these practices and expose potential investors to the undisclosed credit risks of other cryptocurrency companies. We can warn you about it.” The comments are read.
a year long fight
The issue was raised a year ago by the U.S. trustee overseeing the Justice Department’s case, but a Delaware bankruptcy judge rejected it.
In December 2022, U.S. trustee Andrew R. Vara asked the court to appoint an outside investigator to probe the cryptocurrency exchange’s collapse, separate from current FTX CEO John Ray III. Ray opposed the motion, saying the investigation he was leading was sufficient.
In February 2023, Judge John Dorsey denied the motion, saying conducting the two investigations in parallel would be too costly for the property.
“There is no doubt that appointing an examiner would not be in the best interests of creditors,” the judge said at a hearing last year. “Every dollar spent on administrative costs in this case is a dollar less for the creditors.” He said.
Disclaimer: The Block is an independent media outlet delivering news, research and data. As of November 2023, Foresight Ventures is a majority investor in The Block. Foresight Ventures invests in other companies in the cryptocurrency space. Cryptocurrency exchange Bitget is an anchor LP of Foresight Ventures. The Block continues to operate independently to provide objective, impactful and timely information about the cryptocurrency industry. Below are our current financial disclosures.
© 2023 The Block. All rights reserved. This article is provided for informational purposes only. It is not provided or intended to be used as legal, tax, investment, financial or other advice.