107160329 1669991133139 Gettyimages 1244997904 FTX BANKRUPTCY COURT

DOJ watchdog calls for review over crypto fraud allegations

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

Eric Lee | Bloomberg | Getty Images

The Department of Justice has requested that an independent investigator be appointed to review “substantial and serious allegations of fraud, dishonesty” and “incompetence” following the implosion of Sam Bankman-Fried’s crypto empire. This could be one way for the DOJ to gather evidence of alleged fraud.

In a filing with Delaware’s federal bankruptcy court, U.S. bankruptcy trustee Andrew Vara told the court that the allegations of corporate misconduct and overall failure warrant an immediate and prompt investigation into the events that led to FTX’s stunning collapse three weeks ago have, deserve

Vara said there is a substantial basis to believe that Bankman-Fried and other managers of FTX engaged in mismanagement or fraudulent conduct.

“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 bankruptcy estates work together in fraud cases to put together possible restitution or other types of actions to make victims whole,” he said. The DOJ “will likely be part of the asset recovery and possibly have a Victim’s Fund with money going to those who lost money and what the Department of Justice may consider a fraud.”

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

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

Another legal expert said other factors could also be at play, including the extensive political donations involving FTX executives on both sides of the aisle.

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

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

It is not uncommon to hire a bankruptcy examiner. There was one to oversee the crypto-bankruptcy process of Celsius Network, for example.

Bankruptcies above a certain size require an examiner. In this case, the US Trustee stated that an examiner is mandatory because FTX’s fixed, liquidated and unsecured debt to customers exceeds the $5 million threshold.

FTX’s collapse 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 crypto lender, filed for bankruptcy protection in New Jersey last week.

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