SEC initiates legal action against FTX’s auditor

October 1, 2023 Coin Telegraph

The SEC alleges that Prager Metis, an accounting firm engaged by bankrupt crypto exchange FTX in 2021, committed hundreds of violations related to auditor independence.

The United States Securities and Exchange Commission (SEC) has commenced legal proceedings against an accounting firm that had provided services to cryptocurrency exchange FTX prior to its bankruptcy declaration.

According to a September 29 statement, the SEC alleged that Prager Metis provided auditing services to its clients without maintaining the necessary independence, as it allegedly continued to offer accounting services. This practice is prohibited under the auditor independence framework.

To prevent conflicts of interest, accounting and audit tasks must be kept clearly separate. However, the SEC claims that these activities spanned over a period of approximately three years:

“As alleged in our complaint, over a period of nearly three years, Prager’s audits, reviews, and exams fell short of these fundamental principles. Our complaint is an important reminder that auditor independence is crucial to investor protection.”

While the statement doesn't explicitly mention FTX or any other clients, it does emphasize that there were allegedly "hundreds" of auditor independence violations throughout the three-year period.

Furthermore, a previous court filing pointed out that the FTX Group engaged Metis to audit FTX US and FTX at some point in 2021. Subsequently, FTX declared bankruptcy in November 2022.

The filing alleged that since former FTX CEO Sam Bankman-Fried publicly announced previous FTX audit results, Metis should have recognized that its work would be used by FTX to bolster public trust.

Concerns were previously reported about the material presented in FTX audit reports.

On Jan. 25, current FTX CEO John Ray told a bankruptcy court that he had “substantial concerns as to the information presented in these audited financial statements.”

Furthermore, Senators Elizabeth Warren and Ron Wyden raised concerns about Prager Metis' impartiality. They argued that it functioned as an advocate for the crypto industry.

Meanwhile, a law firm that provided services to FTX has come under scrutiny in recent times.

In a Sept. 21 court filing, plaintiffs allege that Fenwick & West should be held partially liable for FTX's collapse because it reportedly exceeded the norm when it came to its service offerings to the exchange.

However, Fenwick & West asserts that it cannot be held accountable for a client's misconduct as long as its actions remain within the bounds of the client's representation.

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FTX’s Bankman-Fried seeks gag order for all witnesses in criminal case

July 24, 2023 Coin Telegraph

Caroline Ellison

Lawyers representing SBF have agreed to a gag order preventing him from making comments that could sway his criminal trial but says it should apply to other witnesses too.

Former FTX CEO Sam Bankman-Fried has agreed to a gag order preventing him from making comments to third parties that may interfere with his trial — but argues other potential witnesses should be gagged as well, including current FTX CEO John Ray.

The gag order against Sam Bankman-Fried was initially requested on July 20, when the U.S. government accused the FTX founder of attempting to interfere with a fair trial by publicly discrediting former business partner and witness Caroline Ellison in an interview with the New York Times.

In a July 22 letter to United States District Court Judge Lewis A. Kaplan of New York, Bankman-Fried’s lawyers Cohen & Gresser LLP denied the accusations but agreed to accept a gag order as requested.

A gag order is a legal order often issued by a court to restrict information or comment from being made public or passed onto any unauthorized third party. In this case, Bankman-Fried will no longer be able to make comments that publicly discredit a government witness by sharing confidential information that may taint the jury pool.

*Legal filing by Cohen & Gresser LLP to District Court Judge Lewis Kaplan in New York. Source: Courtlistener.*

However, in accepting the relief, Bankman-Fried’s lawyers also want the same gag order to be applied to all parties and witnesses that could be involved in his criminal trial.

“We respectfully request that any such relief, however, should apply not just to Mr. Bankman-Fried, but equally to all ‘parties and witnesses’ — namely, the Government and all potential witnesses in this case.”

This would include the U.S. government, former employees of cryptocurrency exchange FTX, FTX Debtor entities, Alameda Research and other potential witnesses involved in the case, according to the attorneys.

Explaining the request, the lawyers said there has been a “toxic media environment” surrounding their client since the collapse of the exchange, noting that FTX CEO John Ray was one of the bigger culprits.

“Most notably, the current CEO of the FTX Debtor entities, John J. Ray III, who has routinely (and gratuitously) attacked and vilified Mr. Bankman-Fried in his public comments and filings in the FTX bankruptcy proceedings,” they said.

“Mr. Ray’s repeated ad hominem attacks on Mr. Bankman-Fried — which have very little do with his role recovering assets for FTX creditors and seem more directed towards publicly vilifying Mr. Bankman-Fried. [This] has left Mr. Bankman-Fried with little choice but to respond,” the lawyers added.

The law firm argued that the U.S. government was applying a double standard by touting several articles that sought to harm SBF’s reputation. This formed the basis of their request for the same gag order for SBF.

SBF pleaded not guilty to a series of fraud charges for the alleged role he played leading to the bankruptcy of FTX. The trial for SBF’s fraud charges begins on October 3.

Collect this article as an NFT to preserve this moment in history and show your support for independent journalism in the crypto space.

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FTX splurged on cartoon, book about humans and ‘Pineapple House,’ alleges CEO

June 27, 2023 Coin Telegraph

Coin Telegraph

Thousands in grants were given out by former FTX executives for niche projects, according to a report by FTX restructuring chief John Ray.

Former FTX executives allegedly splurged millions on funding niche projects unrelated to crypto or Web3, including a uniquely named $1.8 million “Pineapple house.”

A June 26 report from FTX restructuring chief and CEO John Ray laid out the uses of the allegedly misappropriated customer funds.

According to the report, this included “charitable” donations made by the exchange’s co-founder Sam Bankman-Fried and other former executives under the nonprofit FTX Foundation.

Detailed were $700,000 worth of FTX Foundation “grants,” $400,000 of which were given to “an entity that posted animated videos on YouTube related to ‘rationalist and [effective altruism] material,” the report alleged.

Another $300,000 grant was given to an individual to “[w]rite a book about how to figure out what humans’ utility function is (are).”

*Highlighted excerpt of Ray’s report detailing the projects allegedly funded using FTX customer funds. Source: Kroll*

Ray alleged these “grants” used FTX customer funds commingled in various bank accounts controlled by FTX, Alameda Research and various other entities.

The report also lists a $1.8 million property called “Pineapple House” among FTX’s $243 million Bahamian real estate portfolio, allegedly purchased using customer funds.

damn, the real estate industry has been friendly to mr. squarepants pic.twitter.com/uqwGw4wGNz
— Molly White (@molly0xFFF) June 27, 2023

International broker Sotheby’s lists a similarly named property in the Bahamas, although it’s unknown if it is the same Pineapple House listed in the report.

Other uses of the alleged commingled customer funds detailed by Ray included around $20 million sent to the nonprofit organization Guarding Against Pandemics and “related entities.”

As the name suggests, Guarding Against Pandemics advocates for investments to prevent pandemics such as COVID-19, as per its website.

According to Ray, it “worked closely” with the similarly named political action committee Guarding Against Pandemics PAC run by Gabe Bankman-Fried — the younger brother of Sam Bankman-Fried.

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FTX Debtors Unveil Report That Identifies and Discusses Control Failures by Sam Bankman-Fried Led Management

April 10, 2023 Bitcoin.com

FTX lawyers: Examiner could cost $100M and ‘provide no benefit’

January 26, 2023 Coin Telegraph

FTX lawyers: Examiner could cost 0M and ‘provide no benefit’

bahamas

FTX lawyers, joint provisional liquidators of FTX.US and the Bahamas and a committee of creditors have all opposed the appointment of an independent examiner.

An investigation into FTX’s collapse by an examiner could cost the firm upwards of $100 million without providing any benefit to creditors or equity holders, argues lawyers representing the bankrupt crypto exchange.

The arguments were part of a Jan. 25 objection to a motion from the United States Trustee in December, which called for the judge to appoint an independent examiner to ensure any investigations are transparent and their findings made public.

This will be fascinating.

4 Senators submitted a letter asking for an Independent Examiner. Will they do more?

Several States have entered the FTX case. Will they lend support for an Examiner?

The SEC asked for the Independent Examiner in Enron. Will they say anything here? https://t.co/KiSZKYonCD
— MetaLawMan (@MetaLawMan) January 26, 2023

FTX lawyers argued that creditors would not benefit from an examiner investigation which duplicates investigations led by FTX’s CEO John J. Ray III, a committee of creditors, law enforcement agencies, and congress, adding:

“The appointment of an examiner, with a mandate to be determined, can be expected to cost these estates in the tens of millions of dollars. Indeed, if history is a guide, the cost could near or exceed $100 million.”

The creditors committee, also known as The Official Committee of Unsecured Creditors, submitted their own objection to the appointment of an independent examiner on Jan. 25, also citing the prohibitive costs involved and the investigations of various parties which are already underway.

In the original motion, the U.S. Trustee had noted if the court was concerned about the duplication of work, it could allow the examiner to access existing work, adding:

“An examiner may also allow for a faster and more cost-effective resolution of these cases by allowing Mr. Ray to focus on his primary duty of stabilizing the Debtors’ businesses while allowing the examiner to conduct the investigation.”

Joint provisional liquidators in the Bahamas and FTX.US also opposed the appointment on Jan. 25, pointing to a section of the bankruptcy code which allows the judge to appoint an examiner “as is appropriate,” and arguing that the unnecessary costs and delays which would accompany the appointment of an examiner renders it “inappropriate.”

The appointment of an independent examiner has been a key topic throughout FTXs bankruptcy trial.

On Dec. 9 a group of four U.S. senators which included Elizabeth Warren wrote an open letter to Judge John Dorsey of the U.S. Bankruptcy Court for the District of Delaware, claiming that FTX’s counsel Sullivan & Cromwell had a conflict of interest in the case and cast doubt over their ability to provide findings which inspire confidence.

However, the judge ruled on Jan. 20 that there were no potential conflicts of interest sufficient to stop the law firm from continuing to act as FTX’s counsel.

The judge will decide whether to accept the appointment of an independent examiner in a court hearing on Feb. 6.

Independent examiners are often appointed by bankruptcy courts to investigate details of complex cases brought before them, and have been appointed in other high-profile bankruptcy cases such as Lehman Brothers during the subprime mortgage crisis and the crypto exchange Celsius.

FTX reboot could falter due to long-broken user trust, say observers

January 20, 2023 Coin Telegraph

Aaron Lane

Crypto industry observers have questioned whether customers or investors will ever want to "come near" FTX again.

Several crypto industry commentators have laid skepticism on FTX CEO John Ray’s vision to potentially reboot the crypto exchange, citing trust issues and “second-class” treatment of customers as some reasons why users may not “feel safe to go back.”

Former FTX CEO Sam Bankman-Fried tweeted on Jan. 20 praising John Ray for looking at a reboot of FTX, suggesting it is the best move for its customers.

I'm glad Mr. Ray is finally paying lip service to turning the exchange back on after months of squashing such efforts!

I'm still waiting for him to finally admit FTX US is solvent and give customers their money back...https://t.co/XjcyYFsoU0 https://t.co/SdvMIMXQ5K
— SBF (@SBF_FTX) January 19, 2023

This came after John Ray told the Wall Street Journal on Jan. 19 that he was considering reviving the crypto exchange as part of his efforts to make the users whole.

Ray noted that despite top executives being accused of criminal misconduct, stakeholders have shown interest in the possibilities of the platform coming back — seeing the exchange as a “viable business.”

In comments to Cointelegraph, Binance Australia CEO Leigh Travers believes it will be difficult for FTX to secure a license again, particularly as the industry moves into a new year with increased regulation and oversight by regulators.

Travers also noted that since the closure, FTX users have migrated “to other platforms, like Binance.” He questioned whether those users will “feel safe to go back.”

He addressed the fact that FTX governance and controls were called into question, with administrators sharing details about some clients getting “preferential treatment,” including “back door switches.” Travers noted:

“How will users feel comfortable going back to a platform that treated some clients as second-class?”

Digital assets lawyer Liam Hennessy, partner at Australian law firm Gadens, thinks that it would be “very difficult” for FTX, given the reputational damage and lack of trust, for any customer or investor to “come near them again.”

Hennessy was also skeptical whether FTX will ever get approved for a license again, saying that it is “one big question mark” which entirely depends on jurisdictions.

The lawyer believes that in some offshore jurisdictions, it will be easier for the exchange to get license approval, but it will be pointless if its users do not intend to return.

“To jump through the hoops the major jurisdictions will set such as the US, UK and Australia will be a serious challenge.”

Meanwhile, RMIT University Blockchain Innovation Hub senior law lecturer Aaron Lane told Cointelegraph, that it is “not surprising" that FTX would consider reviving the exchange business, stating that is the purpose of the Chapter 11 process — giving the company the ability to propose a plan to run the business and pay the creditors back “over time with the court’s approval.”

He believes that the “onus will be on FTX,” or a creditor that files a competing plan, to show that creditors will get a “better result” under the revival plan compared to liquidating FTX’s assets.

Lane however also questioned whether customers will ever trust FTX again, saying it is possible that another company looking to launch a new exchange “purposes those assets” rather than developing its own interface from scratch.

FTX CEO says he is exploring rebooting the exchange: Report

January 19, 2023 Coin Telegraph

Business

FTX Trading, doing business as FTX.com, was one of roughly 130 companies under FTX Group that filed for bankruptcy following the firm's reported liquidity crunch in November.

John Ray, who took over as CEO of cryptocurrency exchange FTX prior to bankruptcy proceedings, has reportedly set up a task force to consider restarting FTX.com.

According to a Jan. 19 report from the Wall Street Journal, Ray said everything was “on the table” when it came to the future of FTX.com, including a potential path forward with rebooting the exchange. FTX Trading, doing business as FTX.com, was one of roughly 130 companies under FTX Group that filed for Chapter 11 bankruptcy in November 2022.

Ray reportedly was considering reviving the crypto exchange as part of efforts to make users whole. FTX reported on Jan. 17 that it had identified roughly $5.5 billion of liquid assets in its investigations, with more than $3 billion owed to its top 50 creditors. According to the FTX CEO, he considered feedback from some stakeholders who saw the exchange as a “viable business”.

The collapse of FTX and subsequent criminal charges for many of its executives sent ripples through the crypto space in 2022. Former Alameda Research CEO Caroline Ellison and FTX co-founder Gary Wang have pled guilty to fraud charges, while Ray’s predecessor Sam Bankman-Fried has largely denied many of the allegations against him. He pled not guilty and is scheduled to appear in court in October for his trial.

Ray was reportedly assisted by Wang and Ellison in tracking down some of the company’s assets, but he has frequently traded barbs with Bankman-Fried. The former CEO claimed he had been pressured by law firm Sullivan & Crowell and the FTX US general counsel into naming Ray as the head of FTX prior to the firm’s bankruptcy. Ray has also said Bankman-Fried no longer has any role at the exchange and cannot speak on its behalf.

“We don’t need to be dialoguing with him,” Ray reportedly said, referring to Bankman-Fried. “He hasn’t told us anything that I don’t already know.”

FTX US is solvent, as it always as been.https://t.co/XjcyYFsoU0 pic.twitter.com/kn9Wm9wxjl
— SBF (@SBF_FTX) January 18, 2023

SBF said in a Jan. 12 post on a “pre-mortem overview” of FTX that if the exchange were to “reboot,” it might be possible to reimburse customers with assets on hand. The team handling the bankruptcy proceedings and Bankman-Fried have publicly disagreed on approaches calculating FTX’s balance sheet, with the former CEO claiming FTX US was “fully solvent”.

John Ray