FTX points to cost, cyber-risk in opposing independent bankruptcy investigation

The attorneys for FTX said on Monday that a court-supervised probe into the company's collapse would be a waste of time and resources and may even be dangerous.

At the hearing on Monday, FTX attorney James Bromley argued that the proposed review requested by the U.S. Department of Justice's bankruptcy watchdog is so nebulous that it essentially asks an examiner to look at "everything, everywhere, all at once." Judge John Dorsey is presiding over the Chapter 11 case involving the crypto exchange.

In order to look into charges of fraud, wrongdoing, and poor management that are "too critical to be entrusted to an internal probe," the U.S. Trustee has urged Dorsey to appoint an impartial examiner.

In significant bankruptcy cases when the DOJ or a creditor seeks one, such an inquiry is required by federal law, according to Juliet Sarkessian, an attorney for the U.S. Trustee.

Dorsey did not make a decision on Monday, despite his assertion that he thought an examiner was not necessary but should be hired if "appropriate." He requested that the U.S. Trustee, FTX, and its creditors attempt to come to an understanding about the parameters of a future examiner review.

According to FTX, hiring an examiner would just add to the expense and delay of its efforts to pay consumers in bankruptcy by duplicating work already done by FTX, its creditors, and law enforcement authorities.

John Ray, the new CEO of FTX, stated on Monday that the company has already complied with hundreds of requests for information from American regulators, prosecutors, members of Congress, and foreign governments, yielding 70,000 documents in response to 156 information requests from federal prosecutors in Manhattan.

Ray, who guided Enron Corp. and Residential Capital through bankruptcy while working with court-appointed examiners, said in court that the examiners in both instances cost $90 million and $100 million, respectively, but were ineffective.

In reference to the reports generated by the Enron examiner, Ray observed, "They were really shallow - kind of a mile broad and inch deep."

The FTX database is very sensitive, according to Ray, and he is hesitant to provide further outside access in light of the cybersecurity threats that FTX was exposed to at the outset of its bankruptcy.

In this atmosphere, "you might actually press the incorrect key and ruin hundreds of millions of dollars worth of property," he warned.

In November, FTX, previously one of the leading cryptocurrency exchanges in the world, filed for bankruptcy, shocking the industry and leaving an estimated 9 million consumers and investors facing losses in the billions of dollars.

Sam Bankman-Fried, the founder of FTX, has pleaded not guilty to accusations of fraud. He is suspected of stealing billions of dollars from FTX clients to settle debts accrued by his Alameda Research hedge fund. A number of former senior employees, including Caroline Ellison, CEO of Alameda Research, have admitted to fraud.

The liquidators for FTX's Bahamian firm FTX Digital Markets and the official creditors' committee for FTX both agreed with FTX that the planned probe is pointless.

Chris Shore, an attorney representing the Bahamian liquidators, said, "We're all standing around right now in a building that has burnt to the ground and two of the three executives in the firm have pled guilty to arson. Do we really need to spend $100 million on hiring an examiner who will just tell us that the building burnt down?

A balanced report would be advantageous to creditors and consumers, according to state securities regulators in Texas, Vermont, and Wisconsin, who backed the Justice Department's proposal.