The bankruptcy case of FTX has been ordered to appoint an independent examiner by a federal appeals court in response to concerns about rampant fraud leading up to the downfall of the large-scale cryptocurrency exchange.

On Friday, a trio of judges in Philadelphia made a decision on an appeal from the U.S. bankruptcy trustee, who acts as a monitor for the government in Chapter 11 bankruptcy reorganizations. The trustee’s lawyers contended that the financial dealings and operations of FTX, which include accusations of extensive fraud resulting in its downfall, should be examined by an unbiased individual rather than an internal investigation.

Judge John Dorsey of the U.S. Bankruptcy Court rejected the trustee’s petition in February. He concurred with FTX and its committee of unsecured creditors that an examiner’s investigation would be excessively expensive and would overlap with ongoing investigations by FTX’s new leadership, the creditors committee, and multiple federal agencies. Dorsey also expressed trust in John Ray III, who was designated by FTX co-founder Sam Bankman-Fried as the company’s new CEO on the day it filed for bankruptcy.

Bankman-Fried is currently awaiting sentencing in March, following his conviction in November for charges of wire fraud and conspiracy. Numerous other former FTX executives have also admitted guilt to similar charges. According to prosecutors, Bankman-Fried redirected billions of dollars from customer accounts at FTX to his cryptocurrency hedge fund, Alameda Research.

The decision from the higher court overturned Dorsey’s ruling, concurring with the trustee’s argument that the bankruptcy code requires the selection of an examiner.

In certain situations, appeals may involve simple matters despite the complexity of the original case, according to Judge Luis Felipe Restrepo’s statement for the panel. This is one of those instances.

Restrepo stated that while an examiner is obligated to disclose their findings, a debtor or creditors committee conducting an internal investigation does not have the same requirement.

The judge stated that the downfall of FTX led to disastrous consequences for its investors around the globe. Moreover, this event also brought attention to the unpredictable and unstable nature of the cryptocurrency market. The judge also pointed out that investigating FTX could potentially warn potential investors about undisclosed credit risks in other cryptocurrency businesses.

He stated that the examination and report by the investigator not only clarify the situation, but also allow the bankruptcy court to take into account the larger public interest when approving the FTX Group’s reorganization plan.

Source: wral.com