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DOJ watchdog calls for review over crypto fraud allegations

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

Eric Lee | Bloomberg | Getty Images

The Department of Justice has requested that an independent examiner be appointed to review “substantial and serious allegations of fraud, dishonesty” and “incompetence” after the implosion of Sam Bankman-Fried’s crypto empire. It could possibly be a method for the DOJ to assemble evidence of alleged fraud.

In a filing in Delaware federal bankruptcy court, Andrew Vara, a U.S. bankruptcy trustee, told the court that the allegations of corporate misconduct and complete failure merited a right away and speedy examination of the events leading as much as FTX’s stunning collapse three weeks ago.

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Vara said there’s a considerable basis to consider that Bankman-Fried and other managers mismanaged FTX or engaged in fraudulent conduct.

“It seems to me that the DOJ is attempting to use the bankruptcy process as a way of getting evidence,” former federal prosecutor Renato Mariotti told CNBC.

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“Repeatedly, the Department of Justice and bankruptcy estates in fraud cases work together in compiling potential restitution or other forms of actions to make victims whole,” he said. The DOJ “will likely be a part of the asset recovery and potentially having a Victims Fund with money going to people who lost money and what the Department of Justice potentially will view as a fraud.”

“It just shows a level of interest and a spotlight that they are paying to this that needs to be troubling to Mr. Bankman-Fried.”

Vara said an examination is preferable to an internal investigation due to wider implications the corporate’s collapse could have on the crypto industry.

One other legal expert said that there could possibly be other aspects at play, too, including the extensive political donations that FTX executives were involved in with each major political parties.

There have been “campaign donations on either side of the aisle from FTX and there have been political overtones and undertones on this case,” said Braden Perry, former senior trial attorney on the Commodities Futures Trading Commission and a Kennyhertz Perry partner.

“I feel that that is just out of prudence and out of caution to make sure that that whatever is going on is completed at an independent level,” Perry said.

It’s common to appoint a bankruptcy examiner. There was one to oversee the crypto bankruptcy strategy of Celsius Network, for instance.

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

FTX’s November collapse left creditors reeling over the lack of a whole lot of tens of millions of dollars, in some cases, and has rocked the broader crypto world. BlockFi, a crypto lender, filed for bankruptcy protection in Latest Jersey last month.

Bankman-Fried didn’t immediately reply to a request for comment.

Correction: BlockFi filed for bankruptcy protection in Latest Jersey last month. An earlier version misstated the timing.

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