Prager Metis Settles SEC Charges Over FTX Auditing Scandal With $1.95M Fine

• The United States Securities and Exchange Commission (SEC) has reached a settlement with Prager Metis, the auditor involved with FTX Derivatives Exchange.
• The auditor was under scrutiny for allegedly not adhering to ethical and professional standards in their audits of FTX.
• SEC’s crackdown is also extending to entities involved in the NFT sector.

Prager Metis, a former auditor for FTX, settles with SEC over misconduct charges; details on the regulatory actions and broader implications.

SEC Reaches Settlement with FTX Auditor

The U.S. Securities and Exchange Commission (SEC) has finalized a settlement with Prager Metis, the auditor that performed in-house auditing services for FTX Derivatives Exchange before its collapse. Under scrutiny for its lapses, Prager Metis was probed for failing to adhere to accepted standards and ethical codes, failing to identify and report inconsistencies in FTX’s financial statements.

Impact of Auditor’s Negligence

The SEC has accused Prager Metis of falsely representing FTX’s financial health, failing to disclose the intertwined relationship between FTX and Alameda Research, and neglecting to follow generally accepted auditing standards from February 2021 to April 2022. These failures contributed to a significant oversight which many experts believe could have preempted the eventual collapse of FTX.

Details of the Settlement

As part of the settlement, Prager Metis has agreed to pay a total of $1.95 million to resolve two enforcement actions. This includes a civil penalty of $745,000, combined civil penalties amounting to $1 million, and disgorgement with prejudgment interest totaling $205,000. These penalties are intended to account for misconduct in their auditing processes and violations of auditor independence rules.

Broader Regulatory Implications

This settlement is part of a broader regulatory effort by the SEC to clamp down on non-compliance within the crypto and NFT sectors. Recently, the SEC fined Flyfish Club, LLC, $750,000 for the unregistered sale of NFTs marketed as exclusive membership access to a high-end dining club. This case illustrates the SEC’s stance that NFTs intended to offer potential resale value and passive income can be classified as securities.

SEC’s Growing Focus on Crypto Enforcement

SEC’s aggressive stance has not been without contention. Commissioners Mark Uyeda and Hester Peirce have criticized the agency’s intensifying focus on the crypto industry, suggesting it may be overreaching. They believe that the intent of the buyer should not automatically classify an asset as a security and have issued a joint statement expressing their concerns over the SEC’s enforcement approach led by Chairman Gary Gensler.

Conclusion

The settlement between Prager Metis and the SEC underscores the ongoing regulatory challenges and scrutiny facing the crypto industry. As regulators continue to forge a clear path in crypto law enforcement, firms involved in this ecosystem must adhere strictly to ethical and professional standards to avoid punitive actions. This case serves as a stark reminder of the critical need for compliance and the broader implications of regulatory oversight in the evolving landscape of digital assets.