SEC Says FTX Auditor Misunderstood Crypto Market

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The US Securities and Exchange Commission has charged the auditor of collapsed cryptocurrency exchange FTX with misconduct, saying the firm took on Sam Bankman-Fried’s company as a client without properly understanding the crypto market.

Prager Metis, an accounting firm that ranks outside the top 50 US firms by revenue, gave a healthy thumbs up to FTX’s financial results for the two years ahead of its collapse in November 2022, with a hole of $8 billion on its balance sheet.

“In its haste to accept FTX as an audit client, Prager Metis assembled an engagement team that lacked the competence, experience and knowledge to properly perform the audits,” the SEC complaint alleged, including a senior partner who “ basically he didn’t understand. FTX or active crypto markets where it worked”.

From this initial failure resulted a number of other audit failures in the design and execution of the audits, the SEC said.

Specifically, Prager Metis failed to properly understand the relationship between FTX in the Bahamas and Bankman-Fried’s crypto hedge fund, Alameda Research, which was later revealed to have the ability to borrow unlimited client funds from FTX. Bankman-Fried was sentenced in March to 25 years in prison for fraud.

Prager Metis will pay a civil penalty of $745,000 to settle FTX-related allegations without admitting or denying the SEC’s findings.

According to the SEC complaint, FTX needed audited financial statements quickly, and Prager Metis signed an initial set of accounts in July 2021 — five months after taking it on as a client — without properly exploring the loan from Alameda.

“Bankman-Fried and the FTX team were unsuccessful in their previous attempts to identify a firm that was willing to audit FTX’s financial statements and were eager to obtain audited financial statements to support their plan to engage in a public offering . SEC wrote.

Prager Metis took “at face value the contention that Alameda—the Bankman-Fried-owned company that served as the primary market maker for FTX—operated under conditions no different than those that would apply to an individual customer that buy a small amount of bitcoin on margin for the first time.”

The firm did not immediately respond to a request for comment. It also agreed Tuesday to pay $1.2 million to settle separate SEC charges alleging violations of auditor independence rules in dozens of other audits.