SEC Files Lawsuit Against FTX’s Auditor

The US Securities and Exchange Commission (SEC) has filed a lawsuit against Prager Metis, an accounting firm that had dealings with the bankrupt FTX crypto exchange. This development comes as the trial of FTX co-founder and former CEO Sam Bankman-Fried looms on the horizon.

SEC Accuses Prager Metis Of Auditor Independence Violation

In a statement published on September 29, the SEC alleges that Prager Metis has violated hundreds of auditor Independence regulations as well as assisting its various clients in violations of the US securities laws.

The plaintiff states that, between December 2017 and October 2020, Prager unethically included indemnification clauses in its engagement letters for over 200 audits, reviews, and examinations, comprising its independence regarding those agreements. 

For context, indemnification clauses serve as provisions in an engagement letter – a letter of contracts/agreements – which outline a compensation or protection arrangement for the auditing firm in case of certain losses/events. 

The SEC believes that by including such clauses in their agreements with their clients, the FTX former auditor created a conflict of interest that compromised their independence, which is a violation of US federal securities law. 

Commenting on this lawsuit, Eric I. Bustillo, Head of the SEC Regional Office in Miami, said:

Auditor independence is critical to both protecting the integrity of financial reporting and promoting public trust. As alleged in our complaint, over a period of nearly three years, Prager’s audits, reviews, and exams fell short of these fundamental principles. Our complaint is an important reminder that auditor independence is crucial to investor protection.

Furthermore, the US securities market regulator stated that Prager Metis, having allegedly compromised its independence, signed off on various accounting reports of its clients, some of which were used in fillings with the Commission.

In addition, the SEC’s complaint against the auditor also included the audit firm’s failure to inform its clients of its securities law violations even after being informed by the Public Company Accounting Oversight Board.

It is worth noting that there was no mention of FTX or any other clients of Prager Metis in the SEC lawsuit. However, this legal action by the Commission draws much attention from the crypto space due to the relationship between the bankrupt exchange and the accounting firm.

A previous class action lawsuit alleged that Prager Metis, along with Armanimo, another audit firm, was involved in the fraud-related crimes of Sam Bankman-Fried. The plaintiffs stated that by approving the finances of the FTX Group enterprise, both audit firms aided and abetted the former CEO’s use of FTX’s customer assets in funding proprietary investments. 

SBF Trial Approaches 

In other news, the court trial of Sam-Bankman Fried is set to begin on October 4, following the jury selection scheduled for October 3. The trial is expected to last for six weeks, with 15 trial dates set for October and six set for November. 

The former FTX boss is accused of seven counts of fraud, including wire fraud, securities fraud, money laundering, etc. If found guilty, some of these charges could result in a maximum of 20 years imprisonment.

Total crypto market cap valued at $1.065 trillion on the hourly chart | Source: TOTAL chart from Tradingview.com

Featured image from Boardroom, chart from Tradingview