- SEC accused FTX’s former auditor, Prager Metis, of violating U.S. auditor independence rules.
- The US regulator seeks an injunction, civil monetary penalty, and other remedies.
On September 29, the United States Securities and Exchange Commission announced its legal charges against Prager Metis, FTX’s former auditor.
According to the press release, the SEC alleged that the advisory and accounting firm violated auditor independence rules. The press release also revealed that Prager Metis allegedly aided and abetted FTX’s violation of securities laws.
SEC Files Complaint Against FTX Former Auditor
SEC filed a complaint against FTX’s former auditor, Prager Metis. Prager Metis is a New York-based advisory and accounting firm that audited FTX Trading LLC before the company crashed.
According to the SEC’s complaint, the audit firm incorporated indemnification provisions in engagement letters for over 200 audits, reviews, and exams over three years. The indemnification provisions included in engagement letters by Prager conditioned clients to release the audit firm from any liabilities that may arise from intentional misrepresentations by their management.
The incorporation of indemnification provisions in engagement letters is a violation of securities laws, which made the audit firm non-independent.
The regulator’s complaint, filed in a High Court in Florida, also stated that the senior partners at the accounting firm were notified of the firm’s non-compliance with regulations repeatedly.
“The SEC alleges that Prager continued to sign engagement letters containing indemnification provisions and also issued “accountant’s reports” in which it purported to be independent in connection with its audits and exams, even after Prager’s senior partners repeatedly were notified that inclusion of indemnification provisions in engagement letters rendered Prager not independent,” The press release revealed.
In addition, the regulator alleged that Prager Metis failed to advise its client, FTX, of its violations even after a finance oversight body informed the audit firm of its wrongdoings.
According to the court filing documents, the SEC claimed that Prager Metis was notified in 2019 of its gross violation of the securities laws. Yet, the firm continued to sign engagement letters that incorporated indemnification clauses.
“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, Director of the SEC’s Miami Regional Office.
The SEC seeks an injunction, civil monetary penalty against Prager, and disgorgement plus prejudgment interest.
Prager Metis’ Ties to FTX
Although FTX was a client of Prager Metis, the lawsuit against the audit firm is not tied to the firm’s relationship with the client. Prager Metis allegedly included indemnification clauses in over 200 audits, reviews, and exams. The lawsuit instituted against the firm focuses solely on the firm’s general conduct for its clients, not just FTX.
FTX was a client of Prager Metis in 2021. The firm audited FTX Trading LLC, the international arm of the collapsed crypto exchange, and reported $1 billion in revenue for 2021.
