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The U.S. Securities and Exchange Commission has accused the auditor of failed cryptocurrency exchange FTX of misconduct, saying the firm took on Sam Bankman-Fried’s company as a client without fully understanding the cryptocurrency market.
Prager Metis, an accounting firm that ranks outside the top 50 U.S. companies by revenue, gave FTX a clean bill of health for the two years before it collapsed in November 2022 with an $8 billion hole in its balance sheet.
“In its haste to accept FTX as an audit client, Prager Metis assembled an engagement team that collectively lacked the skill, experience, and knowledge to successfully conduct the audits,” the SEC complaint alleges, including a senior partner who “fundamentally did not understand FTX or the crypto asset markets in which it operated.”
From that initial failure flowed a series of other failures in the design and execution of audits, the SEC said.
In particular, Prager Metis failed to properly understand the relationship between FTX, a Bahamas-based company, and Bankman-Fried’s crypto hedge fund Alameda Research, which was later revealed to have the ability to borrow unlimited funds from FTX clients. Bankman-Fried was sentenced in March to 25 years in prison for fraud.
Prager Metis will pay a $745,000 civil penalty to settle the FTX-related charges, without admitting or denying the SEC’s findings.
Bruce Braun, Prager Metis’ attorney at the law firm Sidley Austin, said, “Like others, Prager Metis was the victim of collusive fraud by FTX management. Prager Metis remains committed to audit quality and is committed to continuous improvement.”
According to the SEC complaint, FTX needed audited financial statements quickly and Prager Metis signed off on an initial set of accounts in July 2021 — five months after taking it on as a client — without properly investigating Alameda’s loan.
“Bankman-Fried and the FTX team had been unsuccessful in their previous attempts to identify a firm willing to audit FTX’s financial statements, and they were eager to obtain audited financial statements to support their plan to engage in a public offering,” the SEC wrote.
Prager Metis took “at face value the statement that Alameda—the company owned by Bankman-Fried that served as FTX’s primary market maker—operated on terms that were no different than those that would apply to an individual customer purchasing a small amount of bitcoin on margin for the first time.”
The firm also agreed Tuesday to pay $1.2 million to settle separate SEC charges alleging violations of auditor independence rules in dozens of other audits.
