Abstract：Former SEC and CFTC enforcement chiefs are being recruited by a cryptocurrency exchange to assist in determining what went wrong and communicating with regulators.
Former senior U.S. regulators have been hired to help untangle the mess at cryptocurrency exchange FTX, whose recent collapse has raised concerns about a lack of regulatory oversight.
In its first hearing in Delaware bankruptcy court on Tuesday, a lawyer for FTX stated that the company has hired former enforcement chiefs from the Securities and Exchange Commission and the Commodity Futures Trading Commission, both of whom are now partners at law firm Sullivan & Cromwell LLP, to assist the company's new CEO in determining what went wrong.
FTX has hired Steven Peikin, who was co-director of the SEC's enforcement division from 2017 to 2020, and James McDonald, who was director of enforcement at the CFTC from 2017 to 2020.
Another prominent FTX hire is Nicole Friedlander, who from 2008 to 2016 served as chief of the complex frauds and cybercrime unit at the U.S. attorney‘s office for the Southern District of New York, one of the nation’s most influential federal law-enforcement agencies. Ms. Friedlander is also a Sullivan & Cromwell partner.
Mr. McDonald declined to comment, and Mr. Peikin and Ms. Friedlander did not respond to inquiries.
FTXs bankruptcy hearing disclosed that a “substantial amount” of assets are missing and may have been stolen as a run on customer deposits and a liquidity crunch precipitated a crisis of leadership, which led the firm to collapse. Following its implosion earlier this month, the SEC and the Justice Department are looking into FTX. The Wall Street Journal previously reported that FTX has been in contact with investigators.
It is typical practice in the bankruptcy procedure to hire investigators to investigate accusations. According to lawyers who defend people or corporations accused of white-collar crimes, the employment of two high-profile former regulators with enforcement backgrounds indicates FTX is dedicated to conducting a complete internal probe.
“What a former government official brings to the table is a very sophisticated understanding of how to conduct investigations and how to interface with...various government agencies,” said Justin Weitz, a former Justice Department official and partner at law firm Morgan, Lewis & Bockius LLP, who added that the newly appointed team's priorities will most likely include document preservation.
According to James Bromley, counsel to FTX's new management and a partner at Sullivan & Cromwell, the team will help examine what caused the crypto exchange's demise and will engage with regulators in the United States and around the world. The team of former regulators will report to John J. Ray III, who was named FTX's CEO after the business declared bankruptcy earlier this month.
Mr. Bromley said in court Tuesday that FTX, which is based in the Bahamas, had also hired Nardello & Co., an investigation agency that specializes in anti-corruption and fraud cases. It also hired blockchain data platform Chainalysis Inc. to help identify and secure digital assets, as well as a cybersecurity firm to assist with other aspects of the investigations, according to Mr. Bromley. He did not reveal the name of the cybersecurity firm because of worries about ongoing cyberattacks on FTX.
The bankruptcy case filed by FTX last week stated that one of its primary goals is to conduct transparent investigations of FTX founder Sam Bankman-Fried and others involved in the company, in collaboration with regulators in the United States and overseas. Another purpose of the petition is to install controls at FTX that did not exist or were not robust enough in areas such as accounting, audit, cybersecurity, and human resources.
According to the filing, Mr. Ray, who has overseen some of the largest bankruptcies in history, including the 2001 collapse of energy major Enron Corp., stated that FTX experienced a “total failure of corporate governance” that resulted in a “unprecedented calamity.”
“It's fair to say, we generally would not mention things that happen on Twitter,” Mr. Bromley said in court Tuesday, “but there was a statement that I think captures this very well, which is 'What appears to be taking place is a serious investigation by serious adults.”
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