(Kitco News) - Following attempts made by former FTX CEO Sam Bankman-Fried (SBF) to explain what led to the stunning collapse of the exchange he founded and convince the public that there was no ill-intent in the matter, the Trustee handling FTX's bankruptcy proceedings has called for an independent probe into what he referred to as the "fastest big corporate failure in American history."
Trustee Andrew Vara submitted a motion to the court on Thursday, which highlighted that over the course of eight days in November, debtors "suffered a virtually unprecedented decline in value" from a market high of $32 billion earlier in the year to a severe liquidity crisis after a "proverbial 'run on the bank' amid revelations of multiple corporate failures and misuse of customer funds facilitated by 'software to conceal' it."
Vara was referring to comments made by FTX's new CEO John J. Ray III, who noted on the first day in court that there was a use of "software to conceal the misuse of customer funds" and "a complete absence of trustworthy financial information," with control concentrated "in the hands of a very small group of inexperienced, unsophisticated and potentially compromised individuals."
"The result is what is likely the fastest big corporate failure in American history, resulting in these 'free fall' bankruptcy cases," Vara said.
These revelations prompted the Trustee to call for an independent probe of the exchange due to the far-reaching implications its bankruptcy has had on the crypto community.
"The appointment of an independent examiner would be in the interests of the Debtors' creditors and other parties in interest in the Debtors' estates," he said. "An examiner could – and should – investigate the substantial and serious allegations of fraud, dishonesty, incompetence, misconduct, and mismanagement by the Debtors, the circumstances surrounding the Debtors' collapse, the apparent conversion of exchange customers' property, and whether colorable claims and causes of action exist to remedy losses."
Vara said that an independent examination is preferable to the ongoing internal investigation because the findings and conclusions will be more transparent and made available to the public. Independent examiners have typically been brought into bankruptcy cases when it is in the interest of creditors or when the unsecured debts exceed $5 million.
"Like the bankruptcy cases of Lehman, Washington Mutual Bank, and New Century Financial before them, these cases are exactly the kind of cases that require the appointment of an independent fiduciary to investigate and to report on the Debtors' extraordinary collapse," the Trustee said.
The motion also suggests that an examiner could look into the circumstances surrounding FTX's collapse, customers' funds being moved off the exchange and whether entities that have lost money on FTX are able to claim back losses.
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| A severe lack of oversight led to the downfall of FTX - Sam Bankman-Fried |
And its not just Vara that thinks there was shadiness going on at FTX that needs to be investigated, as Galaxy Digital CEO Mike Novogratz followed up SBF's recent interview with Andrew Ross Sorkin by characterizing the former FTX CEO as "delusional" for saying that the never tried to commit fraud.
"It's kind of surprising that his lawyers are letting him speak," Novogratz said, before adding, "having watched two interviews, the word delusional kept coming to mind."
"The reality is that Sam and his cohorts perpetuated a fraud. They used customer money to make bets that he poorly risk managed after he made them. Let's forget about the risk management, the problem was he took our money. And so he needs to get prosecuted, the authorities need to dig in and figure out exactly what happened, and people will go to jail – should go to jail."
Galaxy Digital previously disclosed that it had a $76.8 million dollar exposure to FTX, which will likely need to be written off as FTX's liabilities far exceed its assets.
So far, authorities have yet to file any charges against anyone involved with FTX, but they do appear to be closely investigating the defunct exchange. On Friday, the U.S. House Committee on Financial Services leadership called for SBF to appear in an investigative hearing scheduled for Dec. 13.
.@SBF_FTX, we appreciate that you've been candid in your discussions about what happened at #FTX. Your willingness to talk to the public will help the company's customers, investors, and others. To that end, we would welcome your participation in our hearing on the 13th.
— Maxine Waters (@RepMaxineWaters) December 2, 2022
