Appeals court orders independent examiner in FTX investigation

Independent examiner for FTX: A federal appeals court on Friday directed the appointment of an independent bankruptcy examiner to investigate the collapse of FTX, the cryptocurrency exchange formerly led by the convicted Sam Bankman-Fried. The 3rd US Circuit Court of Appeals in Philadelphia overturned a previous ruling, agreeing with a government watchdog that the appointment of an examiner was imperative under the US Bankruptcy Code, citing the substantial scale of FTX's case, including the alleged misappropriation of $10 billion in customer assets.

The court underlined that appointing an examiner aligned with Congress's intention to safeguard debtors and creditors, particularly in cases of "great" public interest, a factor deemed relevant in FTX's Chapter 11 reorganisation. Circuit Judge L Felipe Restrepo, speaking for a three-judge panel, noted that the collapse of FTX not only resulted in catastrophic losses for global investors but also carried implications for the dynamic and volatile cryptocurrency industry.

Too important to be left only on creditors

The US Trustee, a Department of Justice bankruptcy watchdog, advocated for an examiner to investigate fraud and mismanagement preceding FTX's collapse, asserting that the matter was "too important" to be left solely to creditors and the current management. John Ray, who assumed the role of chief executive after Bankman-Fried, and a committee of unsecured FTX creditors opposed the appointment of an examiner, arguing that it would duplicate their efforts and prove costly, diminishing the available funds.

This decision marks a reversal of a February 2023 ruling by US Bankruptcy Judge John Dorsey in Wilmington, Delaware, who concurred with FTX's assertion that a probe could incur costs exceeding $100 million. Lawyers representing FTX and the creditors' committee have not immediately responded to requests for comment. Similarly, the Justice Department has not yet provided a response to a similar inquiry.

John Ray, with experience in managing Enron post its 2001 bankruptcy, currently serves as FTX's chief executive. Meanwhile, Sam Bankman-Fried, the 31-year-old co-founder facing seven fraud and conspiracy counts, was convicted by jurors in Manhattan on November 2. Prosecutors allege that Bankman-Fried, once a billionaire, looted billions from FTX customers for personal gain and to support his Alameda hedge fund. His sentencing is scheduled for March 28, and he is expected to appeal the conviction.

(With Reuters inputs)