• The SEC sues Prager Metis for breaking auditor independence rules and aiding clients in violating US securities laws, raising concerns about conflicts of interest.
• Former FTX CEO Sam Bankman-Fried faces a trial on seven fraud charges, including wire fraud and money laundering, with a potential maximum prison sentences of 20 years.

In a significant development, the US Securities and Exchange Commission (SEC) has filed a lawsuit against Prager Metis, a prominent accounting firm known for its involvement with the now-defunct FTX crypto exchange.

The SEC’s lawsuit, unveiled on September 29, contends that Prager Metis committed multiple violations of auditor independence regulations and enabled its clients to breach US securities laws.

Allegations of Auditor Independence Breach

The heart of the SEC’s case lies in Prager Metis’ alleged transgressions concerning auditor independence regulations. According to the SEC, Prager Metis, from December 2017 to October 2020, inserted indemnification clauses into more than 200 engagement letters related to audits, reviews, and examinations.

These indemnification clauses, typically included in engagement letters as provisions to outline compensation or protection in the event of specific losses or circumstances raised serious concerns about conflicts of interest. The SEC asserts this jeopardized the firm’s independence, violating federal securities law.

Eric I. Bustillo, Head of the SEC Regional Office in Miami, underscored the critical importance of auditor independence. He stated, “Auditor independence is vital for preserving the integrity of financial reporting and fostering public trust.” The SEC contends that Prager Metis failed to uphold these fundamental principles for nearly three years, highlighting the essential role of auditor independence in safeguarding the interests of investors.

Involvement in Accounting Reports

Furthermore, the SEC alleges that Prager Metis, despite compromising its independence, actively endorsed various accounting reports prepared by its clients, with some of them subsequently submitting these reports to the Commission. Notably, the lawsuit refrains from explicitly naming FTX or any specific clients of Prager Metis.

Nevertheless, the case has garnered significant attention within the cryptocurrency community due to the firm’s past association with the now-defunct exchange.

In addition to the SEC’s legal action, a previous class action lawsuit has asserted that Prager Metis, in conjunction with another audit firm named Armanimo, played a part in alleged fraud-related activities linked to Sam Bankman-Fried, the former CEO of FTX. The plaintiffs contend that these audit firms actively facilitated the ex-CEO’s utilization of FTX’s customer assets to fund proprietary investments.

Upcoming Trial of Sam Bankman-Fried

The trial of Sam Bankman-Fried, co-founder and former CEO of FTX, is slated to commence on October 4, following jury selection scheduled for October 3. Bankman-Fried faces seven counts of fraud, encompassing charges such as wire fraud, securities fraud, and money laundering. Some of these charges could potentially result in a maximum prison sentence of 20 years if found guilty.

Additionally, a prior court filing revealed that FTX Group engaged Prager Metis to audit FTX US and FTX at some point in 2021. Subsequently, FTX declared bankruptcy in November 2022. The filing contended that Prager Metis should have been conscious that FTX would utilize their work to bolster public trust, given that Bankman-Fried had publicly disclosed prior FTX audit results.

Concerns Surrounding FTX Audit Reports and Legal Developments

Previously, FTX audit reports had drawn scrutiny. On January 25, during a bankruptcy court hearing, John J. Ray III, the current CEO of FTX, expressed “substantial concerns” regarding the accuracy of information presented in these audited financial statements. Senators Elizabeth Warren and Ron Wyden also voiced reservations about Prager Metis’ impartiality, suggesting that the firm appeared to advocate for the interests of the cryptocurrency industry.

Another facet of the legal landscape involves Fenwick & West, a US-based law firm that provides services to FTX. In a court filing dated September 21, plaintiffs alleged that Fenwick & West should bear partial responsibility for FTX’s downfall, as the firm purportedly exceeded standard service offerings to the exchange. However, Fenwick & West argued that it should not bear liability for its client’s wrongdoing as long as it stayed within the boundaries of representing its client.