Dec 1, 2022 - Economy

U.S. Trustee moves for independent examiner in FTX bankruptcy

FTX attorneys arriving for a hearing in Delaware, Nov. 22, 2022.

James Bromley, attorney for FTX, left, arriving for a hearing in Wilimington, Delaware on Nov. 22, 2022. Photo: Eric Lee/Getty

The Department of Justice's U.S. Trustee in the FTX bankruptcy case has moved for the court to appoint an independent examiner.

Why it matters: The examiner would likely produce a large and independent report from a perspective the trustee describes as a "true neutral." This is prudent as a means to unpack "what is likely the fastest big corporate failure in American history," Andrew R. Vara, the U.S. Trustee, wrote in his motion to Delaware's U.S. bankruptcy court.

Quick take: In simple terms, an examiner would be like a P.I. for the court.

How it works: An examiner works independently on behalf of the court and the public, while John Ray III will continue to act as the CEO, seeking to either preserve what remains of the estate or liquidate it in the interest of all stakeholders.

  • The examiner's scope of work can be narrow or broad, depending on what the court decides.
  • Vara's motion seems to be especially focused on whether or not criminal conduct took place within FTX and related companies owned by Sam Bankman-Fried.
  • Comparing the case to that of "Lehman, Washington Mutual Bank, and New Century Financial," Vara writes that an examiner should "investigate the substantial and serious allegations of fraud, dishonesty, incompetence, misconduct, and mismanagement."

In the first section under "Basis for Relief," Vara argues that the law effectively requires an examiner to be appointed in a case if the Trustee requests it and at least one condition is met.

  • The trustee argues that at least two conditions have been met in its motion.

What they're saying: "Was this an unsuccessful business or a successful fraud? In other words, is there anything to save here?" Vara wrote.

The bottomline: An examiner would produce a report the public could study and evaluate, such as the one produced in the case of Lehman Bros, which fell at the start of the 2008 financial crisis, or a recent report showing that crypto lender Celsius was not segregating customer deposits correctly.

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