SEC files lawsuit against Prager Metis, auditing firm linked to FTX crypto exchange’s downfall, citing violations of auditor independence regulations.
The U.S. Securities and Exchange Commission (SEC) has filed a lawsuit against Prager Metis, a global accounting firm that previously conducted audits for the bankrupt crypto exchange FTX. The SEC claimed that Prager Metis allegedly violated auditor independence regulations and assisted its clients in breaking federal securities laws.
SEC’s Complaint Against Prager Metis
According to the complaint filed by the SEC, Prager Metis incorporated indemnification provisions into their engagement letters with over 200 clients, including 62 entities registered with the SEC, from December 2017 to October 2020. These provisions obligated clients to release Prager Metis from any liabilities and costs resulting from intentional misrepresentations by their management.
The SEC alleges that these provisions compromised Prager Metis’s objectivity and impartiality as an auditor, hindering their ability to comply with auditing standards. Moreover, the SEC claims that Prager Metis had knowledge of these violations since at least January 2019 but continued signing engagement letters containing such indemnification clauses.
FTX Group’s Bankruptcy and Prager Metis’s Role
One of Prager Metis’s clients was FTX Group, the parent company of FTX. In November 2022, FTX, a cryptocurrency exchange, filed for bankruptcy. Prager Metis audited FTX’s international arm and reported $1 billion in revenues for 2021. However, FTX faced allegations from the U.S. government regarding a massive fraud scheme that caused a $7 billion shortfall in its balance sheet. Additionally, FTX had intentions of establishing a presence in the Metaverse.
The Securities and Exchange Commission’s (SEC) lawsuit against Prager Metis is not directly related to its ties with FTX. Instead, it focuses on the general conduct of Prager Metis as an auditor for its numerous clients. The SEC aims to obtain an injunction, impose penalties, seek disgorgement of ill-gotten gains, and pursue other necessary remedies from Prager Metis.
“Auditor independence is critical to both protecting the integrity of financial reporting and promoting public trust. As alleged in our complaint, over a period of nearly three years, Prager’s audits, reviews, and exams fell short of these fundamental principles. Our complaint is an important reminder that auditor independence is crucial to investor protection,” said Eric I. Bustillo, the SEC’s Miami regional office director.
Prager Metis has not responded to the SEC’s charges yet. The firm operates globally with offices in North America, Europe, Asia, and Australia. They offers comprehensive services, including audit, tax, advisory, business management, forensic accounting, and litigation support.