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FTX judge weighs demand for independent bankruptcy investigation

[February 06, 2023] By Dietrich Knauth

(Reuters) - A U.S. bankruptcy judge at a court hearing in Delaware will consider on Monday whether to greenlight a court-supervised investigation into the collapse of FTX, a course of action that the crypto exchange has opposed as redundant and wasteful.

The U.S. Department of Justice's bankruptcy watchdog has urged U.S. Bankruptcy Judge John Dorsey, who is overseeing FTX's Chapter 11, to appoint an independent examiner to investigate allegations of "fraud, dishonesty, incompetence, misconduct, and mismanagement" that are "too important to be left to an internal investigation."

FTX says an examiner would merely duplicate work already being done by FTX, its creditors, and law enforcement agencies. FTX has acknowledged that its past conduct raised questions about fraud and mismanagement, but has said another layer of review would only add cost and delay to the company's effort to repay customers in bankruptcy.

FTX, once among the world's top crypto exchanges, shook the sector in November by filing for bankruptcy, leaving an estimated 9 million customers and investors facing losses in the billions of dollars.

FTX's founder Sam Bankman-Fried, who has been accused of stealing billions of dollars from FTX customers to pay debts incurred by his Alameda Research hedge fund, has pleaded not guilty to fraud charges. He is scheduled to face trial in October. Several former top executives, including Alameda Research CEO Caroline Ellison, have pleaded guilty to fraud.

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Former FTX Chief Executive Sam Bankman-Fried, who faces fraud charges over the collapse of the bankrupt cryptocurrency exchange, departs from his court hearing at Manhattan federal court in New York City, U.S. January 3, 2023. REUTERS/David Dee Delgado/

FTX's new CEO, John Ray, who worked with court-appointed examiners while leading Enron Corp and Residential Capital through bankruptcy, has said examiners in those two cases cost a combined $150 million and provided "minimal" benefits to creditors, according to court filings.

FTX's official creditors committee has sided with FTX, saying the proposed investigation is redundant. State securities regulators in Texas, Vermont and Wisconsin supported the Justice Department's bid, saying a neutral report would benefit creditors and customers.

An examiner was appointed in the separate bankruptcy of crypto lender Celsius Network and tasked with investigating claims that Celsius operated as a Ponzi scheme and misled customers about the safety of their cryptocurrency deposits.

The Celsius examiner published a 689-page report on Jan. 31 presenting evidence that Celsius was never solvent, that it misused customer funds to inflate the value of cryptocurrency tokens owned by its founder, and that it used new customer deposits to cover other customers' withdrawals.

(Reporting by Dietrich Knauth; Editing by Alexia Garamfalvi and Daniel Wallis)

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