FTX Implosion Prompts Call for Independent Probe From DOJ Arm

Jeremy Hill, Bloomberg News

The FTX Cryptocurrency Derivatives Exchange logo on a digital device arranged in Riga, Latvia, Nov. 24, 2022. The implosion of Sam Bankman-Fried’s FTX empire dealt a harsh blow to the Bahamas’ ambitions to be a hub for the crypto industry, and it’s causing massive pain for locals who treated the now-bankrupt exchange like a bank. Photographer: Andrey Rudakov/Bloomberg , Bloomberg

(Bloomberg) -- The US Justice Department’s bankruptcy watchdog is calling for an independent probe into the collapse of FTX Group, saying a neutral party should investigate the cryptocurrency empire’s downfall.

The US Trustee, part of the Justice Department that oversees bankruptcy court, has asked FTX’s bankruptcy judge to appoint an examiner in the company’s insolvency proceedings. The examiner would publish a public report on FTX’s implosion and look into allegations of wrongdoing.

“An examiner could -- and should -- investigate the substantial and serious allegations of fraud, dishonesty, incompetence, misconduct, and mismanagement” by FTX, attorneys for the US Trustee said in court papers Thursday. The examiner should also probe “the circumstances surrounding the debtors’ collapse, the apparent conversion of exchange customers’ property, and whether colorable claims and causes of action exist to remedy losses.”

Examiners are sometimes appointed in large, contentious US bankruptcies when a judge deems them necessary. After Lehman Brothers went bust, for example, an examiner eventually published a dense report explaining what went wrong. An examiner is also looking into the downfall of crypto lender Celsius Network LLC.

While the company’s new management has done “valuable preliminary work” untangling FTX’s myriad problems, “the questions at stake here are simply too large and too important to be left to an internal investigation,” lawyers for the US Trustee said in court papers.

Representatives for FTX didn’t immediately respond to an email seeking comment.

The case is FTX Trading Ltd., 22-11068, U.S. Bankruptcy Court for the District of Delaware.