Today, the United States Securities and Exchange Commission (SEC) reached a settlement with Prager Metics, the auditor of the now-defunct cryptocurrency exchange FTX. The decision, which will see the auditor pay $1.95 million in fines, comes as the latest development in the ongoing FTX bankruptcy saga. Today’s announcement highlights the SEC’s intensifying scrutiny of the crypto industry and its associated professional services.
Prager Metis Settles for $1.95 Million
The charges brought by the SEC against the firm include negligence-based fraud and paint a damning picture of its work on FTX. According to the regulator, Prager Metis “misrepresented its compliance with auditing standards” in its work for FTX. The regulator alleges that Prager Metis issued two audit reports for FTX between February 2021 and April 2022 that falsely claimed compliance with Generally Accepted Auditing Standards (GAAS).
“Effective investor protection requires a collaborative approach that includes both regulators and gatekeepers such as auditors,” said Gurbir S. Grewal, Director of the SEC’s Division of Enforcement in the announcement. “To fulfill their role, auditors must, among other things, be independent, exercise due professional care and skepticism, and comply with all applicable professional standards.”
In addition to the fine, Prager will also have to deal with permanent injunctions and undertake “remedial actions” that include the hiring of an independent consultant. According to Grewal, these actions will protect investors by enhancing “investor protection” and serving as a warning to auditors failing to appropriately “gatekeep” the industry.
SEC Warns Against Stablecoin Payouts to FTX Creditors
As the FTX bankruptcy proceedings continue with Sam Bankman-Fried appealing its fraud convictions and Caroline Ellison’s lawyers asking for leniency, the SEC has raised concerns about the proposed plan to repay creditors using stablecoins. In an August 30 filing, the SEC asserted its right to “challenge transactions involving crypto assets,” even those pegged to the U.S. dollar as these would, according to the regulator, constitute “cash”.
The warning could translate to a delay in the $16.3 billion repayment plan proposed by FTX back in May of this year. This, of course, has drawn criticism from investors and industry leaders alike, with Coinbase’s Chief Legal Officer criticizing the regulator’s lack of clarity and stating that “Investors, consumers and markets deserve better. Way better.”
With other recent developments such as Sam Bankman-Fried’s appeal of its fraud convictions and Caroline Ellison’s lawyer’s request for leniency on the horizon, victims should expect a prolonged and complex resolution process as new findings emerge.
Broader Implications for Crypto Fund Advisers
The SEC’s recent settlement and actions extend beyond FTX and its auditors. Earlier this month, the agency charged fund adviser Galois Capital Management for failing to properly custody client assets, including holdings with FTX. While the civil penalty was set at $225k, a triviality in the crypto world, it reflects the SEC’s commitment to enforcing custody rules in the crypto space.
“We will continue to hold accountable advisers who violate their core investor protection obligations,” said Corey Schuster, co-chief of the SEC enforcement division’s asset management unit.
The regulator alleges that Galois held crypto assets in online trading accounts on various exchanges, including FTX, which led to significant losses when FTX collapsed in November 2022. Other crypto fund advisers who fail to comply with the SEC’s custody rule are likely to be sanctioned as well, making it more difficult to operate as regulators fail to establish regulatory clarity around crypto assets.
