Independent examiner rejected by FTX Crypto Judge

Firms working on the FTX bankruptcy case have already billed tens of millions of dollars.

That may be why federal bankruptcy judge John Dorsey on Wednesday (Feb. 15) rejected a request by the US Trustee, a federal watchdog tasked with overseeing corporate bankruptcies, to appoint an independent examiner to oversee the FTX bankruptcy case.

In a 50-minute court hearing that the judge described as “much shorter” than he expected, Dorsey said there was “no doubt” that if a reviewer were appointed, the cost “would be in the tens of millions of dollars and would probably exceed 100 million. »

This comes as law firm Sullivan & Cromwell (S&C), which represents FTX and is assisting the new management, has already billed $7.5 million for just 2½ weeks of work last November, according to documents filed with the court.

The firm said over 6,500 hours were worked by the team of partners, associates and administrative staff, and that the amount billed represents a 20% discount on what would have been a total of $9.5 million.

Every dollar spent represents a dollar lost

The appointment of a receiver would lead to exponential costs for the estate, which would have to be borne by the FTX group of creditors.

“Every dollar spent is a dollar lost by the creditors,” Dorsey said at the hearing, adding that the proposed independent investigation would be redundant to other investigations being conducted by FTX’s new management, as well as law enforcement.

“Given the facts and circumstances of this highly unique case, an agreement would not be in the best interests of creditors, and requiring them to bear the burden of yet another investigation does not help the ultimate goal of maximizing returns for creditors, who are unlikely to already be in close to recouping their losses, the judge said.

Separately, Dorsey cited current FTX chief John J. Ray’s restructuring expertise, experience and judgment as a factor behind his decision that a duplication of supervisory efforts was not necessary.

The American Trustee made arguments suggesting that the appointment of an examiner was necessary to investigate the use of software to conceal alleged misuse of customer funds by FTX.

Wednesday’s FTX decision comes after a lengthy report released on January 31 by the independent examiner appointed to oversee the bankruptcy proceedings of Celsius, another failed crypto firm, made headlines for its strongly worded takedown of the company and its CEO Alex Mashinsky .

Bipartisan Letter from US Senators

Dorsey’s ruling also comes as a blow to Sens. John Hickenlooper, D-Colo., Thom Tillis, RN.C., Elizabeth Warren, D-Mass., and Cynthia Lummis, R-Wyo., who together sent a letter to FTX judges in January asking to appoint a independent sensor.

The senators jointly noted that the law firm S&C “advised FTX for years until its collapse, and one of its partners even served as FTX’s general counsel. … As legal advice is often central to major financial scandals, given their role in drafting financial agreements , risk management practices and corporate controls, it is entirely reasonable to have concerns about the impartiality and manner in which Sullivan & Cromwell will approach any investigation into FTX.”

The lawmakers’ letter represented an “inappropriate ex parte communication,” Dorsey said at a hearing in January, adding that it would have no impact on his decision.

Bankman-Fried has also repeatedly taken aim at S&C, claiming the law firm rushed his former company into bankruptcy proceedings and remained primarily motivated by “chasing fees.”

A representative for Sullivan & Crowell did not immediately respond to PYMNTS’ request for comment.

This week in court

As previously reported by PYMNTS, Bankman-Fried faces separate scrutiny in her own criminal case for improperly using a virtual private network (VPN) to access the internet.

His lawyer claims the disgraced founder just wanted to watch the Super Bowl using his international Bahamian login.

The government fears the disgraced entrepreneur could use the privacy tool to improperly access foreign crypto sites, contact potential witnesses or perform other actions restricted by his bail conditions without being traced.

Individually, leading investment funds Sequoia Capital, Thoma Bravo and Paradigm are among the firms named in a new class-action lawsuit alleging that the FTX investors falsely added “a sense of legitimacy” to a business that the Securities and Exchange Commission has since described as a “fraudulent house of cards.”