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Reversing a lower ruling, the 3rd U.S. Circuit Court of Appeals
in Philadelphia agreed with a government watchdog that
appointing an examiner was mandatory under the U.S. Bankruptcy
Code because of the large size of FTX's case, including the
alleged misappropriation of $10 billion of customer assets.
It also said appointing an examiner reflected Congress's intent
to protect debtors and creditors in cases that have "great"
public interest, an interest that should be taken into account
in FTX's Chapter 11 reorganization.
"The collapse of FTX caused catastrophic losses for its
worldwide investors but also raised implications for the
evolving and volatile cryptocurrency industry," Circuit Judge L.
Felipe Restrepo wrote for a three-judge panel.
The U.S. Trustee, a Department of Justice bankruptcy watchdog,
wanted an examiner to investigate fraud and mismanagement that
occurred at FTX before its collapse, calling it "too important"
to leave to creditors and current management.
John Ray, who replaced Bankman-Fried as chief executive, and a
committee of unsecured FTX creditors opposed appointing an
examiner. They said a probe would duplicate their efforts and
cost too much, leaving less money to go around.
Friday's decision reversed a Feb. 2023 ruling by U.S. Bankruptcy
Judge John Dorsey in Wilmington, Delaware, who agreed with FTX
that a probe could cost more than $100 million.
Lawyers for FTX and the creditors' committee did not immediately
respond to requests for comment. The Justice Department did not
immediately respond to a similar request.
Ray helped manage Enron after the energy trader's 2001
bankruptcy.
Jurors in Manhattan convicted Bankman-Fried on Nov. 2 on all
seven fraud and conspiracy counts he faced.
Prosecutors said the 31-year-old FTX co-founder and former
billionaire looted billions of dollars from FTX customers out of
greed, and to prop up his Alameda hedge fund.
Bankman-Fried's sentencing is March 28. He is expected to appeal
his conviction.
The case is In re: FTX Trading Ltd, 3rd U.S. Circuit Court of
Appeals, No. 23-2297.
(Reporting by Jonathan Stempel in New York; Editing by Sharon
Singleton)
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