Court appoints independent examiner to investigate neutrality issues of FTX bankruptcy team

According to news, the cryptocurrency exchange FTX entered bankruptcy protection proceedings in November 2022. Then, in February 2023, the U.S. Office of the Trustee, the U.S. Department of Justice’s bankruptcy regulator, asked a judge to appoint an “independent examiner” to investigate alleged allegations of fraud, misconduct and mismanagement by FTX. It is said that FTX’s complex interest issues require external investigation, and internal investigations cannot resolve this issue.

The "Independent Examiner" initiative was originally initiated by the Texas Securities Regulatory Commission and has received support from multiple regulatory agencies including California, Florida, Hawaii, Idaho and Washington, DC. They emphasized that given the lack of transparency about the financial status and assets of FTX debtors, it would be more beneficial for creditors to have an independent reviewer. However, Judge John Dorsey initially dismissed the request in February 2023, saying at the time: In cases such as this, I am convinced that the appointment of an independent examiner is not in the best interests of the creditors. We must consider that every additional dollar of administrative overhead effectively means that creditors will lose an equal amount.

The court changed the verdict: an independent reviewer needs to be appointed!

However, the accumulating legal fees in FTX’s bankruptcy case have attracted the attention of the U.S. Department of Justice’s Office of the Trustee. Previously, a bankruptcy court judge approved the trustee’s proposal to hire an independent examiner to investigate FTX’s alleged fraud, misconduct and mismanagement, as well as the costs associated with the bankruptcy liquidation proceedings. Additionally, examiners will investigate whether any FTX employees or managers who engaged in inappropriate conduct are still working at the company.

According to the latest court documents cited, the Third Circuit Court of Appeals in Philadelphia made a mandatory ruling on January 19. Under the ruling, FTX must submit to an investigation by an independent examiner. Judge Luis Felipe Restrepo expressed doubts about the independence of current FTX CEO John Ray. In addition, the current legal team, Sullivan & Cromwell, served as counsel to FTX prior to its bankruptcy and therefore does not meet the "disinterested party" standard. These contents deserve our attention.

“The debtor’s debt exceeds $5 million and requires the appointment of an independent examiner under bankruptcy law. FTX’s situation clearly meets this criterion, and an independent investigation into it will help promote the overall development of the crypto industry ."

John Ray, the current CEO of FTX and head of bankruptcy liquidation, expressed strong opposition to the "independent investigator". He mentioned the cases of cooperation with examiners in the bankruptcy cases of Anlong and Residential Capital that he had previously led, and pointed out that these cases were costly, Anlong spent US$90 million and Residential Capital spent US$100 million, but the actual results were not good. He gave the example that Anlong's independent investigation report was very superficial. This shows that he is not optimistic about the work of independent investigators.

In late June of last year, the bankruptcy court-appointed independent auditor Katherine Stadler submitted a fee review summary report showing that attorneys, consultants and other professionals had charged FTX in the first seven months of the bankruptcy case. Up to $200 million in fees. The irony of this fact is that the costs of handling bankruptcy cases are already considerable.

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