FTX Bankruptcy Lawyers Say Independent Examiner Would Put Assets at Risk

By Stacy Elliott

The judge overseeing the FTX bankruptcy proceeding still hasn't decided whether he will appoint an independent examiner after a 4-hour hearing that included testimony from FTX CEO John Ray III.

Judge John Doresey, who’s overseeing the bankruptcy proceedings, said Monday he’s asked the attorneys representing FTX, the unsecured creditor committee, U.S. Trustee and the Joint Public Liquidators of the Bahamas to discuss “a consensual resolution.” The next FTX court hearing is scheduled for Wednesday, but there’s no sign yet the judge will make a ruling then.

Ray was appointed when crypto exchange FTX filed for bankruptcy and founder Sam Bankman-Fried stepped down on November 11. The company, once an influential giant in the industry, is accused of having commingled client funds with those of its sister company, Alameda Research—a crypto trading firm also founded by Bankman-Fried.

Ray said during his testimony on Monday that he and his team have been fielding daily requests from state and federal investigators. Ray also testified that he did not find examiner's reports helpful in two prior bankruptcies he's overseen, Enron and Residential Capital, adding that "the reports were somewhat ambivalent in the conclusionary sense."

The FTX legal team has been arguing that the cost of an independent examiner would be significant and duplicate a lot of the work that Ray's team has been doing since November.

Between the day that he was appointed and the end of last year, Ray said that he has done $690,000 worth of work for the company.

But the U.S. Trustee assigned to the case, Juliet Sarkessian, argued that 18 states have voiced their support for an examiner to be appointed. The latest has been Texas, which filed its joinder last week along with 15 other states.

James Bromley, an FTX attorney, argued that "to allow anyone else into that cybersecurity environment will jeopardize the security of everything that has gone forward and everything that will go forward. With all due respect, the U.S. Trustee's Office views this as if we have a warehouse full of sacks of potatoes. We do not. We have a virtual environment that is filled with code and even looking at that code puts it at risk."

The company has seen hundreds of millions of dollars worth of assets leave in “unauthorized transfers” after it filed for bankruptcy. Last month, the restructuring team at FTX said in a presentation that $90 million worth of funds stolen on November 12 were from FTX US.

FTX’s liquidators have shown signs themselves of not knowing how to navigate the crypto assets they’ve been charged with accounting for and recovering. In January, blockchain analytics firm published a report showing that FTX had lost $72,000 worth of Wrapped Bitcoin because they apparently didn’t understand how to repay an Aave loan in order to unlock the collateral that was deposited to secure it.

“Rather than paying back the debt to close out the position, the liquidators opted to remove all the extra collateral, putting the position in danger of liquidation,” the Arkham team wrote in the report. “This resulted in the liquidation of around 4 WBTC, $72K at current prices.”

Ray elaborated on FTX's lack of corporate controls, which he has said in court documents amount to a dumpster fire.

"The pre-petition environment allowed insiders to freely transfer assets of the company with no accountability, no tracing," Ray said Monday. "Literally, one of the founders could come into this environment, download half a billion dollars out of wallets on a thumb drive and walk off with them. And there'll be no accounting for that whatsoever. It's virtually unthinkable, really, in a controlled environment."

Later in his testimony, he talked about the hack that occurred the same day he took over the company. By November 12, assets worth $650 million had been drained from FTX wallets in unauthorized transfers.

"Someone described the wallets in this AWS system as sort of needles in a haystack of needles," he said of trying to track down the wallets that got drained. "It was really 48 hours of what I can only describe as pure hell."

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