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DOJ watchdog calls for review of crypto fraud allegations

DOJ watchdog calls for review of crypto fraud allegations
Written by boustamohamed31

John Ray, CEO of FTX Cryptocurrency Derivatives Exchange, arrives at the bankruptcy court in Wilmington, Delaware, US, on Tuesday, Nov. 22, 2022

Eric Lee | Bloomberg Getty Images

The Justice Department has asked for an independent examiner to be appointed to review “substantial and serious allegations of fraud, dishonesty” and “incompetence” after the collapse of Sam Bankman-Fried’s crypto empire. This may be one way for the DOJ to gather evidence of alleged fraud.

In a filing in federal bankruptcy court in Delaware, U.S. Bankruptcy Trustee Andrew Vara told the court that allegations of corporate malfeasance and total failure merit immediate and swift consideration of the events that led to FTX’s stunning collapse three weeks ago.

Vara said there are strong grounds to believe Bankman-Fried and other managers mismanaged FTX or engaged in fraudulent behavior.

“It seems to me that 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 bankruptcy estate in fraud cases work together in drafting potential restitution or other types of actions to make victims whole,” he said. The Department of Justice “will likely be part of the asset recovery and potentially have a victim fund with money going to those who have lost money and what the Department of Justice will potentially view as fraud.”

“It just shows a level of interest and attention that they are paying to what Mr. Bankman-Fried should be concerned about.”

Vara said the review was preferable to an internal investigation because of the broader implications the company’s collapse could have on the crypto industry.

Another legal expert said there may be other factors at play, including the extensive political donations FTX executives have been involved in with the two major political parties.

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

“I think it’s just out of prudence and out of caution to make sure that whatever happens is done at an independent level,” Perry said.

It is not unusual for an insolvency practitioner to be appointed. There was one to oversee the Celsius Network crypto bankruptcy process, for example.

Bankruptcies above a certain amount require an examiner. In that case, the US trustee said the examiner was required because FTX’s fixed, liquidated and unsecured debts to customers exceeded the $5 million threshold.

FTX’s collapse in November left lenders worried about losing hundreds of millions of dollars, in some cases, and rocked the wider crypto world. BlockFi, a crypto lender, filed for bankruptcy protection in New Jersey last month.

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

Correction: BlockFi filed for bankruptcy protection in New Jersey last month. An earlier version incorrectly specified the time.

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