Justice Department Watchdog Calls for Review of Crypto Fraud Allegations

Justice Department Watchdog Calls for Review of Crypto Fraud Allegations
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John Ray, CEO of FTX Cryptocurrency Derivatives Exchange, arrives at bankruptcy court in Wilmington, Delaware, USA, on Tuesday, Nov. 2, 2022.

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The Department of Justice has requested that an independent examiner be appointed to review “serious and substantial allegations of fraud, dishonesty” and “incompetence” after the Sam Bankman-Fried Crypto Empire Implosion. It could be a way for the Justice Department to gather evidence of suspected fraud.

In a filing with Delaware federal bankruptcy court, US bankruptcy trustee Andrew Vara told the court that the allegations of corporate misconduct and total bankruptcy warranted an immediate and expedited examination of the events leading up to the startling FTX collapse three weeks ago.

Vara said there is substantial basis to believe that Bankman-Fried and other managers mismanaged FTX or engaged in fraudulent conduct.

β€œIt sounds to me like the DOJ is trying to use the bankruptcy process as a way to get evidence,” former federal prosecutor Renato Mariotti told CNBC.

“Many times, the Department of Justice and the bankrupt estates in fraud cases work together to collect possible restitution or other types of actions to make victims whole,” he said. The DOJ “will likely be a part of asset recovery and potentially have a Victims Fund with money going to those who lost money and what the Department of Justice will potentially view as fraud.”

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

Vara said that an examination is preferable to an internal investigation due to the broader implications that the company’s collapse may have on the cryptocurrency industry.

Another legal expert said there could also be other factors at play, including extensive political donations that FTX executives were involved in with both major political parties.

There have been “campaign donations on both sides of the FTX aisle and there have been shades and political undertones to this case,” said Braden Perry, former lead trial attorney for the Commodity Futures Trading Commission and a partner at Kennyhertz Perry.

“I think this is just out of prudence and out of an abundance of caution to make sure that whatever is happening is done at an independent level,” Perry said.

It is not unusual to appoint a bankruptcy examiner. There was one to oversee the Celsius Network crypto bankruptcy process, for example.

Bankruptcies above a certain size require an examiner. In this case, the US trustee said an examiner is required because FTX’s fixed, settled and unsecured debts to clients exceed the $5 million threshold.

FTX’s collapse in November left creditors reeling from the loss of hundreds of millions of dollars, in some cases, and has rocked the crypto world in general. BlockFi, a cryptocurrency lender, filed for bankruptcy in New Jersey last month.

Bankman-Fried did not immediately respond to a request for comment.

Correction: BlockFi filed for bankruptcy in New Jersey last month. An earlier version incorrectly expressed the moment.

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