FTX Bankruptcy Judge Agrees Independent Examiner Would Mean More Risk

By Stacy Elliott

Appointing an independent examiner in the FTX bankruptcy proceedings “would create an increased risk of further loss through inadvertent disclosures or hacking,” Judge John Dorsey said in a hearing on Wednesday.

Dorsey, who’s overseeing the crypto exchange’s Chapter 11 case in Delaware, denied a motion from the U.S. Trustee to appoint an examiner. He cited concerns about security and cost, echoing arguments made last week by attorneys representing FTX, the creditor committee, and the joint provisional liquidators.

When a bankruptcy judge appoints an independent examiner, debtors have to pay the bill. That means FTX would have had to pay for an investigation that Dorsey estimated could have cost more than $100 million.

“It is important to keep in mind that while we talk about the cost of an investigation being borne by the debtors, we are actually talking about the cost being borne by the creditors,” Dorsey said during the hearing. “Every dollar spent in these cases on administrative expenses is $1 less to the creditors.”

To bolster its argument against an examiner, the FTX legal team had newly appointed FTX CEO John Ray testify last week. Ray, himself an attorney, was named CEO when founder Sam Bankman-Fried stepped down on November 11, the same day the company filed for Chapter 11 bankruptcy protection.

Dorsey referenced Ray’s testimony during his statement Wednesday, specifically recalling that Ray said he did not find independent examiner reports helpful in past bankruptcy restructurings.

In December, Sarkeesian filed a motion to have an examiner appointed to “investigate the substantial and serious allegations of fraud, dishonesty, incompetence, misconduct, and mismanagement.” A month later, the committee of unsecured creditors and FTX itself objected to the motion saying it would be too costly and duplicate much of the work Ray has already done.

Last week, during arguments for and against the appointment of an examiner, James Bromley, one of FTX’s lead attorneys, quipped that the U.S. Trustee was underestimating how easy it would be for an investigator to inadvertently lose FTX’s assets.

“With all due respect, the U.S. Trustee's Office views this as if we have a warehouse full of sacks of potatoes,” Bromley said during the hearing. “We do not. We have a virtual environment that is filled with code and even looking at that code puts it at risk."

Before the motion was denied, a sizable group of state securities regulators joined U.S. Trustee Juliet Sarkeesian in calling for an independent investigation into the events that preceded FTX’s collapse. By February 2, the list of states supporting her motion included Wisconsin, Vermont, Alaska, Arkansas, California, Florida, Hawaii, Idaho, Illinois, Kentucky, Maine, Maryland, New Hampshire, New Jersey, North Carolina, Oklahoma, Tennessee, and D.C.

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