DOJ Requests Independent FTX Bankruptcy Probe, Reportedly to Acquire Fraud Evidence

Due to “substantial and serious allegations of fraud, dishonesty,” and “incompetence,” the Department of Justice (DOJ) has sought the appointment of an independent investigator to probe the demise of Sam Bankman-Fried’s crypto empire, FTX. 

The DOJ may use this method to collect evidence of corruption.

Separate Probe

US bankruptcy trustee Andrew Vara filed documents in Delaware federal bankruptcy court. 

In his arguments, as reported by CNBC, the claims of corporate misconduct and catastrophic failure demanded a prompt investigation into the circumstances behind FTX’s shocking collapse three weeks ago.

According to Vara, there is reasonable suspicion that Bankman-Fried and other FTX managers were either negligent in their management duties or were involved in fraudulent activity.

Former federal prosecutor Renato Mariotti told CNBC, “It seems to me that the DOJ is trying to use the bankruptcy process as a way of getting evidence.”

In situations of fraud, Mariotti said that DOJ and bankruptcy estates sometimes work together in compiling possible restitution or other forms of proceedings “to make victims whole.”

He added that to compensate victims of what the DOJ may consider a fraud, the agency will be a part of the asset recovery and maybe have a Victims Fund.

“It just shows a level of interest and attention that they’re paying to this that should be troubling to Mr. Bankman-Fried,” said Mariotti.

Given the potential impact of the company’s demise on the crypto sector as a whole, Vara has said that an external audit is preferable to an internal probe.

Read More: Former FTX CEO Sam Bankman-Fried Denies Fraud Allegations in New Interview

Different Angle

CNBC said another legal expert speculated that external circumstances, such as the executives of FTX’s heavy involvement in political contributions to both main political parties, may be at play.

As per Braden Perry, a partner at Kennyhertz Perry and a former senior trial attorney at the Commodities Futures Trading Commission, “campaign donations on both sides of the aisle from FTX and there have been political overtones and undertones in this case.”

Perry defended the move, saying it was done “out of prudence and out of caution” to ensure any action taken was carried out independently.

The appointment of a bankruptcy trustee is common practice. One was appointed to manage Celsius Network’s crypto bankruptcy.

An examiner must be appointed in cases of bankruptcy exceeding a specific magnitude. 

Because FTX’s fixed, liquidated, and unsecured obligations to customers are more than $5 million, the US trustee has deemed the engagement of an examiner to be required.

The Aftermath

The collapse of FTX in November shook the cryptocurrency industry as a whole and left creditors suffering from the loss of hundreds of millions of dollars. 

Recently, cryptocurrency lender BlockFi filed for bankruptcy in New Jersey. FTX is supposed to be a prospective bidder for the struggling firm.

The company’s declaration disclosed 100,000 creditors and $1 to $10 billion in assets and liabilities. It revealed a $275 million loan to Sam Bankman-bankrupt Fried’s FTX US.

Moreover, BlockFi’s largest client owes $28 million, according to its Chapter 11 petition.

Read More: FTX Japan Is Preparing to Enable Customer Withdrawals

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