Prager METIS agreed to pay $1.95 million to settle with the SEC including $745,000 for violations related to FTX and $1.2 million for failing to comply with auditor rules.
Prager METIS pays $1.95 million fine to settle with SEC over alleged 'negligence' in FTX audit
On September 17, the U.S. Securities and Exchange Commission (SEC) announced that Prager METIS, the international auditing firm that was responsible for auditing FTX, has agreed to pay $1.95 million to settle allegations of negligence in its audit of FTX before the exchange collapsed in November 2022 .
Prager METIS, the international accounting firm hired to audit FTX before its collapse, has agreed to pay nearly $2 million to settle two negligent probes by the @SECGov . @cheyenneligon reports https://t.co/V5QeD0Pv1T
— CoinDesk (@CoinDesk) September 17, 2024
Specifically, Prager METIS will pay a $745,000 fine for violations directly related to FTX and $1.2 million to resolve errors in compliance with auditor rules. In addition to paying the $1.95 million fine, Prager METIS will also hire an independent consultant to review its auditing processes to avoid similar mistakes in the future. The company will also be subject to certain restrictions on accepting new clients until it improves its quality control processes. Gurbir Grewal, executive director of the SEC’s enforcement division, said:
“Improper audits like Prager METIS’ leave investors without important safeguards when making investment decisions. By restricting Prager METIS from taking on new clients and requiring them to hire independent counsel, we not only protect investors, but also serve as a reminder to auditors of their responsibilities.”
According to the SEC, Prager METIS failed to fulfill its responsibility in evaluating FTX's finances for 2021 and 2022. The company is accused of violating the Generally Accepted Accounting Standards (GAAS), resulting in the issuance of misleading financial statements, misleading investors into believing that FTX was still maintaining a solid financial foundation.
In fact, the exchange has been in a serious crisis due to the lack of transparency related to Alameda Research, an investment fund owned by Sam Bankman-Fried. A big mistake by Prager METIS was not realizing the complex connection between FTX and Alameda.
According to SEC filings, Alameda had been quietly using funds from FTX’s customer accounts without proper oversight. However, Prager METIS failed to detect these irregularities and failed to take the necessary steps to assess the potential financial risks between the two entities.
With those shortcomings, Prager METIS published reports assuring that FTX's financial situation was stable and inadvertently provided a misleading picture to investors.
Prior to the investigation and trial, multiple members of Bankman-Fried’s management team testified that Alameda was able to borrow huge amounts of money from FTX without limits, revealing serious deficiencies in internal controls and basic accounting procedures at both companies. After John Ray took over as FTX’s new CEO, he pointed out that:
“FTX and Alameda had virtually no internal controls and did not clearly segregate financial accounts.”
Since John Ray took over as CEO, FTX has taken positive steps in restructuring to address the aftermath of the crisis. FTX recently received court approval FTX agreed to pay $12.7 billion to creditors after reaching a settlement with the CFTC . In addition, the exchange also reached an agreement to pay $885 million to the Internal Revenue Service (IRS) instead of having to pay up to $24 billion in taxes as originally proposed by the IRS. Most recently, FTX reached an agreement with Emergent to recover 55 million Robinhood shares (worth $600 million) to restore assets to creditors.
As for Sam Bankman-Fried, the founder and former CEO of FTX, after being sentenced to 25 years in prison in March 2024 for allegedly defrauding investors of billions of dollars, he filed an appeal . He said the court was unfair in the trial process and argued that FTX was in fact able to pay its debts and that the collapse of the exchange was due to a liquidation crisis, not a deliberate fraud as alleged.
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