An independent bankruptcy examiner must complete an investigation into the collapse of FTX, a federal appeals court ruled Friday.

In violation of U.S. bankruptcy code

The ruling, delivered by the Third Circuit Court of Appeals in Philadelphia, argues that to not appoint an independent examiner would violate the bankruptcy code of the United States. An independent examiner was originally requested by a U.S. Trustee in December 2022, but was rejected by bankruptcy court Judge John T. Dorsey in February in February 2023.

The latest ruling reversed that decision and rules that a current investigation by current FTX CEO John Jay Ray III is not sufficient enough. “In addition to providing much-needed elucidation, the investigation and examiner’s report ensure that the Bankruptcy Court will have the opportunity to consider the greater public interest when approving the FTX Group’s reorganization plan,” the latest ruling read in part.

“A complete failure of corporate controls”

The federal appeals court ruling comes just months after Bankman-Fried was found guilty on all counts of fraud leveled against him for misappropriating billions of dollars of customer funds in November 2023. Bankman-Fried appointed Ray, who previously was responsible for retrieving over $820 million worth of creditors’ funds to defunct American energy company Enron, just days after FTX collapsed in November 2022.

“Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here,” Ray wrote in a 2022 court filing.

“From compromised systems integrity and faulty regulatory oversight abroad to the concentration of control in the hands of a very small group of inexperienced, unsophisticated, and potentially compromised individuals, this situation is unprecedented,” Ray continued.

“Catastrophic losses for worldwide investors”

In Friday’s ruling, Judge Luis Felipe Restrepo ruled that an independent investigation may be beneficial for the cryptocurrency industry as a whole.

“The collapse of FTX caused catastrophic losses for its worldwide investors but also raised implications for the evolving and volatile cryptocurrency industry,” the ruling read in part. “For example, an investigation into FTX Group’s use of its own cryptocurrency tokens, FTTs, to inflate the value of FTX and Alameda Research could bring this practice under further scrutiny, thereby alerting potential investors to undisclosed credit risks in other cryptocurrency companies.”

Last month, the Department of Justice announced that it would not conduct a second trial against Bankman-Fried for additional charges, including bribery and bank fraud. His sentencing is currently scheduled to take place on March 28th in Manhattan federal court.

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