Another FTX Casualty, Prager Metis Settles With SEC for $1.95m

Key Takeaways

• FTX auditor Prager Metis has settled with the SEC for audit norm violations.
• Prager Metis conducted two defunct FTX audits between 2021 and 2022.
• SEC accused Prager of falsely claiming to have followed GAAS standards while auditing FTX.

The aftershocks of the FTX fiasco continue to reverberate nearly two years after the company’s catastrophic failure in November 2022.

The latest ripple in the ongoing enforcement effort has reached a key cog in the exchange’s machinery: its audit firm, Prager Metis.

In a settlement announced on Sept. 17, the Securities and Exchange Commission (SEC) levied a $1.95 million penalty on the audit firm as part of an ongoing investigation into the businesses and firms accountable for FTX’s rise and fall.

Audit Firm Violated Policies to Give FTX Clean Sheets

According to the SEC, the audit firm’s reviews of FTX’s financial records were riddled with problems, violating fundamental principles of auditing and independence.

Between February 2021 and April 2022, Prager Metis issued two audit reports that purported to have been conducted per Generally Accepted Auditing Standards or GAAS.

However, the SEC alleged that these reports were inaccurate and misleading, as the firm had failed to follow proper procedures and ignored potential risks.

The audit firm’s shortcomings, the SEC charged, were particularly egregious in its assessment of the complex relationship between FTX and Alameda Research, a hedge fund controlled by the exchange’s chief executive.

“This quality control failure led Prager to fail to comply with GAAS in multiple aspects of the audit, most significantly by failing to understand the increased risk stemming from the relationship between FTX and Alameda Research LLC, a crypto hedge fund controlled by FTX’s CEO,” the SEC wrote.

Prager Metis has agreed to settle the SEC’s charges, consenting to pay a civil penalty of $745,000 and a separate disgorgement of $1.2 million, for a total of $1.95 million.

The firm has also agreed to be permanently barred from future auditing work, a major punishment for what the SEC characterized as negligent and reckless conduct.

Prager Metis Had a History of Violations

The civil penalties against the audit firm are not a first.

Prager Metis has previously faced regulatory action for violating auditor independence rules.

Between December 2017 and October 2020, the firm conducted over 200 audits, reviews, and exams that the SEC alleged were not independent of its clients. As a result, Prager Metis was fined $1 million and ordered to pay a combined disgorgement with prejudgment interest of $205,000.

Prager Metis also agreed to pay $1 million and combined disgorgement with prejudgment interest of $205,000 for violating auditor independence rules and aiding and abetting their clients’ violations of federal securities laws.

The SEC takes auditor independence very seriously, and for good reason. As Eric I. Bustillo, director of the SEC’s Miami Regional Office, noted, “Auditor independence is critical to investor protection and a fundamental cornerstone of the integrity of our financial markets.”

In the case of FTX, Prager Metis’s lack of independence was a contributing factor to the exchange’s downfall.

The firm’s failure to conduct proper audits allowed FTX to continue fudging its balance sheet and hiding its true relationship with Alameda Research , a hedge fund controlled by the exchange’s chief executive.

The consequences were disastrous: FTX, once the world’s second-largest exchange, collapsed in November 2022, wiping out billions of dollars in customer funds.