Bankruptcy court Judge John Dorsey declined to rule definitively on whether to appoint an independent examiner into the FTX bankruptcy case. The U.S. government argued that statute called for the judge to demand such an examination while FTX said a probe would represent a costly duplication.
After expressing concerns the examiner’s work could be expensive and delay approval of a Chapter 11 reorganization plan, Dorsey said he hoped the issue could be resolved between the two sides ahead of a further hearing on Wednesday.
“How could I confirm a plan if I've appointed an examiner to let me know whether there was insiders who did something wrong?” Dorsey asked. “It really doesn't make any sense to be a mandatory obligation by the court that is not subject to discretion.”
Juliet Sarkessian, representing the U.S. Trustee, a branch of the Department of Justice (DOJ) concerned with bankruptcy matters, had argued the decision was effectively out of the judge’s hands in such a major case.
“This is what Congress decided needed to be done in these circumstances,” Sarkessian said, citing the relevant section of the Bankruptcy Code. “FTX’s situation is a dumpster fire.”
“There's no reason to believe that the cost of the examiner during an investigation is going to be more than the debtors’ professionals conducting an investigation,” Sarkessain added, referring to FTX lawyers’ fees that can top $2,000 per hour.
An examiner could look at alleged misuse of customer funds and security of digital assets at the exchange, and whether any of those responsible were still employed by FTX, Sarkessian said.
Lawyers for FTX and its creditors argued the report would be a waste of estate resources, and that alleged wrongdoers had already left the company.
“We do not have enough money to pay back all of our creditors and the U.S. Trustee … says that we should spend tens or even hundreds of millions of dollars” on a report, said James Bromley of FTX’s law firm, Sullivan & Cromwell. There is “no evidence that any of those professionals or this examiner to be appointed would be any more independent” than the company’s own staff and hired experts, Bromley added. FTX’s new chief executive, John J Ray III, had previously cited $90 million to $100 million as a typical cost for an examiner’s report, based on his experience working with companies such as Enron.
In January, a bipartisan group of U.S. senators wrote a letter to the judge to support having the independent examiner envisaged under the Bankruptcy Code to probe allegations of fraud or incompetence at the failed crypto exchange.
Last week, four months after being appointed by a New York court, examiner Shoba Pillay published her 500-page report on the collapse of crypto lending company Celsius Network, saying the company had misled customers and used customer funds for operational expenses.