- FTX‘s collapse ranks among the worst in crypto history.
- Auditors signed off FTX’s books for two years before its collapse.
- The SEC alleged the auditors lacked crypto competence.
The crypto industry has seen its share of scandals, from the BitConnect Ponzi scheme to the Mt. Gox hack, which resulted in the loss of 850,000 BTC. Yet none rival the FTX collapse, which exposed an $8 billion black hole in the company’s finances.
Two years after the FTX collapse, the fallout is still unfolding. In the latest development, FTX’s former auditor, Prager Metis, has agreed to settle misconduct charges with the Securities and Exchange Commission (SEC), underscoring the scandal’s lingering impact.
The SEC Takes Aim
FTX’s former auditor, Prager Metis, has agreed to settle the SEC misconduct allegations by paying $1.95 million to resolve pending regulatory actions. This settlement includes penalties for issues tied to FTX and broader violations unrelated to the crypto exchange.
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The SEC accused Prager Metis of misrepresenting audits by approving FTX’s accounts for two consecutive years while falsely claiming they followed Generally Accepted Auditing Standards (GAAS). The SEC described this as “negligence-based fraud,” attributing $745,000 of the total settlement to these violations.
On separate charges unrelated to FTX, the SEC alleged that Prager Metis had violated auditor independence rules and aided over 200 clients in breaking federal securities laws between 2017 and 2020. This portion of the settlement amounted to $1.2 million.
Former FTX Auditor In Firing Line
The SEC stated that Prager Metis displayed a significant lack of competence and understanding of the crypto market, particularly in failing to recognize the risks associated with FTX’s close relationship with its sister company, Alameda Research.
Gurbir S. Grewal, the SEC’s director of the Division of Enforcement, emphasized that FTX investors lacked vital protections due to the audit firm’s negligence.
A Prager Metis representative told the Financial Times that the firm “was a victim of the collusive fraud by management at FTX,” like others, and remains dedicated to enhancing audit quality and continuous improvement.
FTX’s Downfall
Although FTX had grown to become the third-largest crypto exchange and boasted a glamorous reputation with high-profile celebrity endorsements, it was struck by rumors of insolvency in November 2022. A subsequent run on its native FTT token forced the company to file for bankruptcy.
Investigations into the company’s operations revealed massive fraud and embezzlement, including the purchase of luxury real estate and even a yacht.
Critics argued the scale of the fraud was possible partly due to the lack of regulatory safeguards in the crypto industry.
During the trial of former CEO Sam Bankman-Fried, Caroline Ellison, co-CEO of Alameda, testified that FTX’s credit line to Alameda was partially funded by FTX customer accounts.
While many believed this was a response to the crypto contagion triggered by the Terra LUNA collapse, Ellison confirmed that Alameda had been using FTX customer funds even before the crisis.
On the Flipside
- Ellison awaits sentencing for her part in the FTX scandal.
- Audits can bolster investor confidence, but they are not foolproof, especially in rapidly evolving fields like cryptocurrency.
Why This Matters
The FTX collapse revealed critical flaws in the systems designed to safeguard investors. While the SEC’s actions against Prager Metis are commendable, they offer little solace to those who lost money in the debacle.
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