The U.S. Trustee in FTX’s bankruptcy case made a bold move Monday as they filed an appeal against a recent decision by Judge John Dorsey that denied an independent examiner to look into the crypto exchange giant’s collapse. FTX filed for Chapter 11 bankruptcy last November following a run on their reserves that revealed the company did not have enough assets to cover its customers’ investments. In response, the U.S. government moved to appoint an examiner to look into the extraordinary nature of the exchange’s fall. The motion—which was initially filed by the U.S. Trustee last December—would have utilized an expert investigator to build a full report on FTX, similar to proceedings related to the collapse of other financial giants such as Lehman Brothers and Washington Mutual Bank.
The U.S. Trustee noted that appointing an examiner would help determine the size of creditors’ refunds, as well as “let me know whether there was insiders who did something wrong.” Despite having the backing of multiple securities regulators from 17 states, including Florida, California, and Illinois as well as Washington D.C., the motion was denied.
Judge Dorsey rejected the motion, saying that it could potentially put assets at risk, especially due to the “virtual environment” of FTX’s code. FTX’s lawyer James Bromley argued that the U.S. Trustee’s Office was underestimating security concerns, saying “the U.S. Trustee’s Office views this as if we have a warehouse full of sacks of potatoes. We do not. We have a virtual environment that is filled with code and even looking at that code puts it at risk.”
The unsecured creditors and FTX itself also objected to the U.S. Trustee’s motion, saying an investigation would duplicate much of the work that had already been done by FTX and its new CEO John Jay Ray III. Ray III testified in a hearing last month, saying an examiner’s reports had not been helpful in previous bankruptcy proceedings he’d overseen, calling them “somewhat ambivalent” in terms of drawing conclusions.
Despite this opposition, the U.S. Trustee stuck to their guns, pushing back against the court’s decision with an appeal on Monday. In their filing, the DOJ branch argued that the “statute called for the judge to demand an examination.” Juliet Sarkessian, representing the U.S. Trustee, said the “question at stake is simply too large and too important to be left to an internal investigation.” Sarkessian also suggested the cost of the examiner could be much less than the fees hired experts can bring, saying “FTX lawyers’ fees can top $2,000 per hour.”
This stance was further reinforced by a bipartisan group of U.S. senators, who wrote to the judge to support having the independent examiner envisaged under the Bankruptcy Code to look into the allegations of fraud and incompetence at the failed crypto exchange.
The appeal from the U.S. Trustee comes hot on the heels of a similar saga running parallel to the FTX case. Examiner Shoba Pillay recently published her report on the collapse of crypto lending company Celsius Network after four months of investigation. The 500-page report found that Celsius Network misled customers and used customer funds for its own operations.
It’s now up to the court to decide if the DOJ’s appeal will have any success, and whether justice will be served in the form of an independent examiner’s report on FTX’s collapse. If so, the investigation could bring much-needed clarity to the situation and finish the entire case with a full report that looks into the “dumpster fire” of FTX’s situation. But with a reported cost of $100 million, it could be a costly mission and is yet another legal hurdle in the turbulent aftermath of FXT’s bankruptcy.
The crypto world waits with bated breath while justice hangs in the balance. The outcome of this appeal will decide whether an independent examination is necessary or if FTX can finish the process on its own – and the resolution the company’s creditors have been awaiting for months.