The Department of Justice is requesting an independent investigation into the FTX bankruptcy, a potential tactic to gather evidence of alleged fraud

John Ray, CEO of FTX Cryptocurrency Derivatives Exchange, arrives in bankruptcy court in Wilmington, Delaware, United States, on Tuesday, November 22, 2022.

Eric Lee | bloomberg | Getty Images

The Department of Justice has asked to hire an independent examiner to review “substantial and serious allegations of fraud, dishonesty” and “incompetence” following the collapse of Sam Bankman Fried’s cryptocurrency empire. It may be one of the methods the Department of Justice uses to collect evidence of alleged fraud.

In a suit filed in federal bankruptcy court in Delaware, US bankruptcy trustee Andrew Varra told the court that allegations of corporate misconduct and outright failure deserve an immediate and speedy examination of the events that led to the spectacular collapse of FTX three weeks ago.

Fara said there is a substantial basis to believe Bankman-Fried and other directors mismanaged FTX or engaged in fraudulent behaviour.

“It seems to me that the Department of Justice is trying to use the bankruptcy process as a means of obtaining evidence,” former federal prosecutor Renato Mariotti told CNBC.

“Often, the Department of Justice and bankruptcy fraud properties work together to piece together potential damages or other types of action to make the victims whole,” he said. The DOJ would likely be part of the asset recovery and would likely have a victims fund with money going to those who lost money and what the DOJ might see as a fraud.

“It just shows a level of care and attention that they are giving to this matter which should be a matter of concern to Mr. Bankman Fried.”

Fara said the scrutiny is preferable to an internal investigation due to the broader implications of the company’s collapse for the cryptocurrency industry.

Another legal expert said there could be other factors at play as well, including the extensive political donations FTX executives have engaged in with both major political parties.

There were “campaign donations on both sides of the aisle from FTX and there were political overtones and overtones in this case,” said Braden Berry, former chief prosecutor of the CFTC and partner of Kennehertz Berry.

“I think that was just out of a sense of caution and caution to make sure that everything that happens is done on an independent level,” Perry said.

It is not unusual to hire a bankruptcy examiner. There was one to oversee Celsius Network’s crypto bankruptcy, for example.

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

The collapse of FTX in November left creditors reeling from the loss of hundreds of millions of dollars, in some cases, and rocked the broader crypto world. BlockFi, a cryptocurrency 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 was mistimed.

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