A federal appeals court on Friday ordered the appointment of an independent bankruptcy examiner to investigate the Nov. 2022 collapse of FTX, the cryptocurrency exchange once led by the convicted Sam Bankman-Fried.
Reversing a lower ruling, the 3rd U.S. Circuit Court of Appeals in Philadelphia agreed with a government watchdog that appointing an examiner was mandatory under the U.S. Bankruptcy Code because of the large size of FTX's case, including the alleged misappropriation of $10 billion of customer assets.
It also said appointing an examiner reflected Congress's intent to protect debtors and creditors in cases that have "great" public interest, an interest that should be taken into account in FTX's Chapter 11 reorganization.
"The collapse of FTX caused catastrophic losses for its worldwide investors but also raised implications for the evolving and volatile cryptocurrency industry," Circuit Judge L. Felipe Restrepo wrote for a three-judge panel.
The U.S. Trustee, a Department of Justice bankruptcy watchdog, wanted an examiner to investigate fraud and mismanagement that occurred at FTX before its collapse, calling it "too important" to leave to creditors and current management.
John Ray, who replaced Bankman-Fried as chief executive, and a committee of unsecured FTX creditors opposed appointing an examiner. They said a probe would duplicate their efforts and cost too much, leaving less money to go around.
Friday's decision reversed a Feb. 2023 ruling by U.S. Bankruptcy Judge John Dorsey in Wilmington, Delaware, who agreed with FTX that a probe could cost more than $100 million.
Lawyers for FTX and the creditors' committee did not immediately respond to requests for comment. The Justice Department did not immediately respond to a similar request.
Ray helped manage Enron after the energy trader's 2001 bankruptcy.
Jurors in Manhattan convicted Bankman-Fried on Nov. 2 on all seven fraud and conspiracy counts he faced.
Prosecutors said the 31-year-old FTX co-founder and former billionaire looted billions of dollars from FTX customers out of greed, and to prop up his Alameda hedge fund.
Bankman-Fried's sentencing is March 28. He is expected to appeal his conviction.
The case is In re: FTX Trading Ltd, 3rd U.S. Circuit Court of Appeals, No. 23-2297.
