The Third Circuit Court of Appeals Orders Independent Investigation of FTX
The Third Circuit Court of Appeals in Philadelphia has ruled that FTX, the crypto exchange currently undergoing bankruptcy proceedings, must be investigated by an independent examiner. This decision comes after the U.S. Trustee overseeing the FTX bankruptcy requested an investigation, which was initially denied by the Delaware bankruptcy judge.
The appellate judges believe that a probe led by FTX’s current CEO, John Ray III, is insufficient and that an independent examination could reveal important insights into industry practices within the crypto space.
Judge Luis Felipe Restrepo emphasized the need for an examiner who is not associated with FTX and its employees. There are concerns that individuals who may have engaged in fraudulent activities could still be employed at FTX Group. Furthermore, the judge noted that FTX’s lawyers, Sullivan & Cromwell, were previously advisors to the company before it filed for bankruptcy.
According to Restrepo, appointing an independent examiner is a requirement under the Bankruptcy Code when a debtor’s debts exceed $5 million, which is certainly the case with FTX. The judge believes that an investigation into FTX’s use of its own cryptocurrency tokens, FTTs, to inflate the value of the company and Alameda Research could bring attention to undisclosed credit risks in other cryptocurrency firms.
A Year-Long Battle
This issue was first raised over a year ago by the U.S. Trustee representing the Justice Department but was initially denied by the Delaware bankruptcy judge. In December 2022, U.S. Trustee Andrew R. Vara requested the appointment of an outside examiner to independently investigate FTX’s collapse. However, John Ray III opposed this motion, arguing that his ongoing probe was sufficient.
In February 2023, Judge John Dorsey denied the motion, expressing concerns about the costs associated with conducting two parallel investigations. He believed that every dollar spent on administrative expenses for the case would reduce the amount available to creditors.
Hot Take: Independent Probe Could Bring Transparency to the Crypto Industry
The Third Circuit Court of Appeals’ decision to order an independent investigation of FTX could have significant implications for the entire crypto industry. By examining FTX’s practices, such as the use of its own cryptocurrency tokens to inflate values, potential risks and fraudulent activities could be exposed. This scrutiny may also raise awareness among investors about undisclosed credit risks in other cryptocurrency companies. Ultimately, an independent probe will contribute to greater transparency and trust within the crypto space.
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