SEC v. Prager Metis CPAs, LLC, No. 1:24-cv-07025, Southern District of New York (Sept. 18, 2024) — Complaint

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
___________________________________________
)
SECURITIES            AND                                                               )
EXCHANGE COMMISSION,   )
          )
Plaintiff,                                )                    Civil Action No. 24-CV-7025
)
v.         )
         ) JURY TRIAL DEMANDED
PRAGER METIS CPAs, LLC,    )
          )
                                    Defendant.                                       )
___________________________________________ )

COMPLAINT
Plaintiff Securities and Exchange Commission (the “Commission” or “SEC”), for its
complaint against Prager Metis CPAs, LLC (“Prager Metis” or “Defendant”), alleges as follows:
SUMMARY
1. In February 2021, Prager Metis undertook an audit of the financial statements of
FTX, then one of the world’s largest crypto asset trading platforms.
1
  Less than two years later,
in November 2022, FTX collapsed, wiping out billions in investor equity and billions more in
misappropriated customer deposits.
2. Prager Metis was aware at the time that it began the engagement that FTX was
raising funds from equity investors, and that FTX intended to become a publicly traded
company.  Prager Metis issued two audit reports—in July 2021 and April 2022—stating that the
firm had conducted audits of the FTX financial statements, and that it had done so in accordance
with generally accepted auditing standards.  These statements were material to FTX equity
investors in connection with FTX’s offer and sale of equity securities.  And Prager Metis knew

1
 As described in paragraph 13, FTX refers to FTX Trading Ltd. and various subsidiary entities, including FTX
Digital Markets Ltd., a Bahamas company.

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or should have known that the statements were not true:  its audits of FTX were not in fact
conducted in accordance with Generally Accepted Auditing Standards (“GAAS”).
3. The foundational failure to meet GAAS stemmed from the fact that the Prager
Metis engagement partner fundamentally did not understand FTX, or the crypto asset markets in
which it operated.  In its rush to accept FTX as an audit client, Prager Metis assembled an
engagement team that collectively lacked the competence, experience, and knowledge to
appropriately conduct the audits.  From this initial failure flowed a series of other auditing
failures in the design and execution of the audits.  These failures resulted in the issuance of audit
reports that each contained an opinion that FTX’s financial statements presented fairly, in all
material respects, the financial position of FTX and its subsidiaries in accordance with
accounting principles generally accepted in the United States of America (Generally Accepted
Accounting Principles or “GAAP”).  But, due to the auditing failures, Prager Metis lacked
sufficient appropriate audit evidence to support those opinions.
4. The most significant deficiency was Prager Metis’s failure to understand FTX’s
relationship with Alameda Research LLC (“Alameda”) (the trading firm belonging to FTX’s
founder and owner Sam Bankman-Fried) and the pivotal role Alameda played in FTX’s business.
Despite the interconnected nature of the companies and the significant financial transactions
between them, Prager Metis and the audit engagement team failed to adequately assess the risk
of material misstatement presented by the FTX-Alameda relationship.  As a result, the audit plan
and procedures largely excluded Alameda.  Ultimately, the FTX-Alameda relationship was at the
heart of the misappropriation of billions of dollars of FTX customer assets that led to the collapse
of FTX in November 2022.

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VIOLATIONS
5. By engaging in the conduct set forth in this Complaint, Defendant violated
Sections 17(a)(2) and (3) of the Securities Act of 1933 (“Securities Act”) [15 U.S.C.
§§ 77q(a)(1) and (3)].
6. Unless Defendant is permanently restrained and enjoined, it may continue to
engage in the acts, practices, transactions, and courses of business set forth in this Complaint and
in acts, practices, transactions, and courses of business of similar type and object.
NATURE OF THE PROCEEDING AND RELIEF SOUGHT
7. The Commission brings this action pursuant to the authority conferred upon it by
Section 20(b) of the Securities Act [15 U.S.C. § 77t(b)].
8. The Commission seeks a final judgment:  (i) permanently enjoining Defendant
from engaging in the acts, practices, transactions and courses of business alleged herein;
(ii) imposing civil money penalties on Defendant pursuant to Section 20(d) of the Securities Act;
and (iii) ordering such other and further relief the Court may find appropriate.
JURISDICTION AND VENUE
9. This Court has jurisdiction over this action pursuant to Sections 20(b), 20(d), and
22 of the Securities Act [15 U.S.C. §§ 77t(b), 77t(d), and 77v].  In connection with the conduct
alleged in this Complaint, Defendant, directly or indirectly, made use of the means or
instruments of transportation or communication in, and the means or instrumentalities of,
interstate commerce, or of the mails.
10. Venue is proper in the Southern District of New York pursuant to Section 22(a) of
the Securities Act [15 U.S.C. § 77v(a)].  Specifically, one or more investors in FTX obtained

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information regarding the audit of FTX’s financial statements from Prager Metis while located in
the Southern District of New York.
DEFENDANT
11. Prager Metis CPAs, LLC is an accounting and auditing firm headquartered in
New York, New York, which has been registered with the Public Company Accounting
Oversight Board (“PCAOB”) since 2003.  Prager Metis provides accounting, auditing,
consulting, and tax services to a variety of companies, including public issuers whose securities
are registered with the Commission and trade in the U.S. markets.
RELEVANT PARTIES AND ENTITIES
12. The “Engagement Partner” was, at all relevant times, a Prager Metis equity
partner auditing the financial statements of public and private companies.  He was the lead audit
partner, known as the engagement partner, for the Prager Metis audits of FTX’s financial
statements.  At all relevant times, the Engagement Partner was acting within the scope of his
employment.
13. FTX Trading Ltd. (d/b/a FTX.com) is an Antigua and Barbuda limited
corporation.  FTX Trading Ltd. and its subsidiary entities, including FTX Digital Markets Ltd. (a
Bahamas company), are referred to collectively as “FTX.”  FTX’s principal place of business
was in Hong Kong and The Bahamas.  FTX operated a global crypto asset trading platform and
began operations in or around May 2019.  FTX was available to customers in most countries, but
stated that it would not provide services to customers in the United States and several other
countries.  On or about November 11, 2022, FTX and certain of its affiliates filed Chapter 11
bankruptcy petitions in the United States Bankruptcy Court for the District of Delaware.
2

2
 FTX US is the d/b/a for a subsidiary of West Realm Shires Inc., a separate legal entity from FTX Trading Ltd. that
provided different services, including to US customers.  FTX US’s conduct is not the subject of this complaint.

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14. Alameda Research LLC is a Delaware company that had operations in the
United States, Hong Kong, and The Bahamas.  Alameda Research LLC and its subsidiaries,
including Alameda Research Ltd. (a British Virgin Islands company), are collectively referred to
herein as “Alameda.”  Alameda was a quantitative trading firm specializing in crypto assets.
With FTX, Alameda filed for Chapter 11 bankruptcy in the United States Bankruptcy Court for
the District of Delaware, Case No. 22-11068 (Bankr. Del.).
FACTS
I. Prager Metis Audited the FTX Financial Statements.
A. Prager Metis Accepted the FTX Audit Engagement.
15. The Prager Metis Engagement Partner was introduced to Bankman-Fried in late
January 2021.  Bankman-Fried and the FTX team had been unsuccessful in their prior attempts
to identify a firm that was willing to audit FTX’s financial statements, and they were eager to
obtain audited financial statements to support their plan of engaging in a public offering (which
would generally require audited financial statements).  FTX was also conducting private
fundraising rounds with equity investors, who were also seeking audited financial statements as
part of their diligence process.
16. The engagement moved forward quickly, with a “kick-off” meeting on or about
February 8, 2021, before the internal Prager Metis client acceptance process was finalized.  FTX
sought to have the audit completed and an audit report released by April 2021 for its financial
statements covering part of 2019 (from April 2019, when FTX began operations, to December
2019) and all of 2020.  The Engagement Partner began assembling an engagement team, while
pushing the internal Prager Metis client acceptance process forward toward completion.
17. During the internal client acceptance process, Prager Metis partners raised
concerns to each other and the Engagement Partner about Prager Metis taking on a complicated,

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first-time audit of a crypto industry client on an accelerated schedule, particularly at a time of
year when their resources were heavily utilized (their “busy season”).  Prager Metis partners also
noted that taking on FTX as a client would be a high-risk engagement, that the firm lacked
sufficient experience auditing crypto industry companies (and trading platforms in particular),
and that they understood from FTX that its internal financial reporting function was virtually
nonexistent.  One Prager Metis partner emailed the Engagement Partner after the initial meeting
with FTX noting that there appeared to be billions of dollars in unrecorded assets, that the
financial statement information that had been circulated before the meeting appeared to be
inaccurate, and that there were significant related-party transactions that had not been booked.
18. The Engagement Partner was undeterred by these concerns.  He acknowledged
that staffing would be “somewhat on the fly,” but advocated for moving forward quickly.  The
Engagement Partner brought in two outside contractors to assist with the audit, but they too
lacked experience in auditing a crypto asset trading platform of the size and complexity of FTX.
More importantly, they could not overcome the fundamental deficiencies in knowledge and
competence of the Engagement Partner, who was ultimately responsible for directing and
supervising their work.
19. Prager Metis partners also raised questions specifically about the qualifications of
the Engagement Partner to lead the engagement, and it was acknowledged that he had only
recently developed limited experience in the industry.  But despite this awareness, Prager Metis
never conducted an adequate assessment of the Engagement Partner’s capabilities.  The firm thus
failed to identify that the Engagement Partner was not competent to audit a large, complex crypto
asset trading platform.  He did not understand the basic technology behind crypto assets or the
crypto asset industry.  He lacked basic knowledge about foundational concepts, including crypto

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wallets and blockchain technology.  He lacked knowledge of basic terminology regarding crypto
assets.  He lacked an understanding of the functionality of crypto asset trading platforms.  And
he had no awareness of prior, widely publicized, instances of crypto asset industry failures and
frauds.
20. Despite policies and procedures at Prager Metis that were designed to evaluate
new client engagements, particularly those that were deemed high-risk, and even though
questions and concerns had been raised internally from the initial stages, Prager Metis accepted
FTX as a client.
21. On February 17, 2021, FTX signed the engagement letter and formally engaged
Prager Metis as its independent auditor for its financial statements encompassing fiscal year
2020 and April to December of 2019.
B. Prager Metis Conducted Two Audits of FTX’s Financial Statements.
22. The Prager Metis team conducted a series of video calls and obtained documents
from FTX from February 2021 through July 2021.  The Prager Metis team ultimately met, via
video call, multiple members of the FTX team, including Bankman-Fried and Nishad Singh, who
was initially Head of Engineering at Alameda and then became Head of Engineering at FTX,
while retaining his role and title at Alameda.  The Engagement Partner had the opportunity to
observe that the founders and senior leaders of FTX lacked significant business experience.  He
also had the opportunity to observe that the corporate structure at FTX was loose and informal.
23. As discussed further below, the Engagement Partner was responsible for
designing and implementing audit procedures that identified the risks of material misstatements
in the FTX financial statements.  But because he did not understand FTX, or the crypto asset
industry generally, he failed to adequately assess the risks of material misstatements, and thus
failed to design and implement audit procedures to obtain sufficient appropriate audit evidence to

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properly respond to those risks.  Significantly, the Engagement Partner failed to understand the
relationship between FTX and Alameda, a related party, and the role that Alameda (and its
employees) played in FTX’s business.
24. The Engagement Partner knew or should have known that Alameda, a quantitative
trading firm specializing in crypto assets, was founded and owned by Bankman-Fried and Gary
Wang, who also founded FTX.  Until October 2021, Bankman-Fried was the CEO of both FTX
and Alameda.  FTX and Alameda shared a number of employees and resources and had offices
in the same location.  The Engagement Partner was aware of the interrelated nature of the two
companies, and even believed—incorrectly—that FTX did not have any employees at all, but
rather that all employees at FTX were actually Alameda employees.
25. Prager Metis requested that FTX complete a “Related Party Questionnaire,” in
which FTX disclosed certain services that Alameda provided to FTX, including a Payment Agent
Agreement (in which an Alameda entity provided cash management services to FTX) and a
Services Agreement (through which Alameda provided FTX with research and development
services).  FTX provided documents that purported to memorialize these arrangements, which
were executed, on behalf of both FTX and Alameda, by Bankman-Fried.

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Ex. 1 Final Page of Services Agreement Provided to Prager Metis by FTX

Ex. 2 Final Page of Payment Agent Agreement Provided to Prager Metis by FTX
26. Despite this and other information regarding the relationship between FTX and
Alameda, Prager Metis lacked the basic understanding and competence required to evaluate the
nature and scope of that relationship, and the potential impact on FTX’s financial statements and
footnote disclosures.
27. There were numerous instances in which the Prager Metis team assessed

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connections between FTX and Alameda in a cursory manner, without engaging in reasonable
analysis of the related risks.  For instance, Prager Metis failed to understand and properly
evaluate the risks posed by the fact that, during the periods covered by the financial statements
Prager Metis audited, Alameda was a custodian of the cash deposited by FTX customers to fund
their FTX trading accounts.  The Engagement Partner himself lacked a basic understanding of
the flow of FTX customer funds, later explaining that he believed that FTX customers sent their
cash (fiat currency) not into another bank account but rather directly “into the exchange” and
“into the blockchain,” which is not an accurate understanding of either blockchain technology or
the processes employed at FTX.
28. FTX had provided Prager Metis documents that showed that FTX customers who
wished to fund their trading accounts with cash instead of crypto assets were instructed to wire
the money to Alameda’s bank accounts.  The engagement team thus had the information needed
to plan an audit that included inquiries into the segregation and handling of those assets.  Those
inquiries could have included, for example:  (1) whether the Alameda bank accounts holding
FTX customer funds were custodial or “for the benefit of” accounts; (2) whether Alameda
commingled FTX customer cash with its own cash; (3) how the custodial funds were reconciled
to FTX’s internal ledger; (4) what, if any, internal controls or processes existed to ensure that
Alameda was a proper custodian of these FTX customer funds; and (5) whether there was an
actual custodial agreement between Alameda and FTX governing this relationship.  But the audit
plan did not cover or address these issues.
29. Moreover, because Prager Metis did not understand Alameda’s role as a purported
custodian of cash belonging to FTX customers, its engagement team could not reasonably
analyze FTX’s decision not to recognize its customers’ crypto assets or cash on its balance sheet.

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And because the Engagement Partner did not understand basic aspects of FTX’s business model,
he failed to design an audit that included procedures to identify whether certain assets were
appropriately recognized and presented in FTX’s financial statements, and if included, whether
they contained sufficient footnote disclosure.
30. FTX told Prager Metis that it loaned funds to Alameda, but the Prager Metis team
did not design and execute sufficient procedures to obtain audit evidence for this activity.
Instead, Prager Metis memorialized the limited audit evidence they collected on this issue with
this one-line workpaper:

Ex. 3 Prager Metis Workpaper Regarding Alameda Borrowing
31. Prager Metis apparently inquired no further into the nature or extent of Alameda’s
borrowing, taking at face value the statement that Alameda—the company Bankman-Fried
owned and that served as the primary market maker for FTX—operated under terms that were no
different than those that would apply to an individual customer purchasing a small amount of
bitcoin on margin for the first time.  Prager Metis took no steps to consider the size of the overall
borrowing arrangement or consider the potential risks of a borrowing arrangement with a related
party.  And because Prager Metis failed to understand the extent of Alameda’s purported

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borrowing of funds from FTX, the engagement team never understood or evaluated Alameda’s
unique ability to borrow virtually unlimited amounts from FTX, and how that ability to borrow
might affect the accuracy of FTX’s financial statements.
32. Thus, because the Engagement Partner did not fundamentally understand FTX’s
business, its relationship with Alameda, or the crypto asset industry as a whole, he could not—
and did not—develop and document an audit plan that adequately assessed the risks of material
misstatement in the financial statements or update that plan as necessary during the audit.  The
Engagement Partner’s lack of understanding about FTX and its relationship with Alameda, and
the lack of professional skepticism regarding information that was provided regarding Alameda,
effectively meant that—other than at a generally superficial level—Alameda was removed from
the scope of the Prager Metis audit of FTX’s financial statements.
33. On July 30, 2021, FTX issued its first Consolidated Financial Statements, which
covered 2020 and a portion of 2019.  Prager Metis issued an accompanying Independent
Auditor’s Report, stating its opinion that the Financial Statements presented fairly, in all material
respects, the financial position of FTX in accordance with GAAP.  Prager Metis represented in
the audit report that:  “We conducted our audits in accordance with auditing standards generally
accepted in the United States of America.”  The Independent Auditor’s Report was signed in the
name of Prager Metis, with the authorization of the Engagement Partner.
34. The statements regarding the audits being conducted in compliance with GAAS
were material to investors in the offering of equity investments in FTX.  In fact, during the audit,
a member of the Prager Metis engagement team was asked to speak to several prospective FTX
investors about Prager Metis’s audit, and did, in fact, speak to at least one prospective investor,
in Manhattan.  Moreover, the Engagement Partner also knew, or should have known, that the

13
audit report and the financial statements would be made available to current and prospective
equity investors in FTX after they were issued and provided to FTX.
35. In January 2022, Prager Metis began the audit of FTX’s financial statements for
the period ended December 31, 2021.  The engagement letter was signed on January 17, 2022.
Prager Metis did not engage in a substantive review of the client continuation or analyze whether
the engagement team had the competence to undertake another audit of FTX’s financial
statements.
36. The Prager Metis engagement team for the second audit was substantially the
same as the prior team, led by the Engagement Partner, and followed the same deficient
processes as the prior audit.  The engagement team continued to accept and rely on superficial
documentation and information regarding the role of Alameda in FTX’s business.  The team
used the same document describing Alameda’s borrowing as in the prior year.  See Ex. 3, supra.
They did so despite the fact that Prager Metis had received information that, in 2021, the
purported related party receivable balance due from Alameda to FTX had risen from $0 to $1.2
billion.
37. Despite the massive increase in that line item—indeed, $1.2 billion was
approximately 44% of FTX’s total assets in 2021—the Prager Metis engagement team failed to
perform sufficient transaction testing of this balance.  Prager Metis moreover had access to
FTX’s account details, which indicated that this line item included several large, round-number
transactions of hundreds of millions of dollars between FTX and Alameda.  These included two
transactions of $400 million each, sent by FTX to an Alameda-controlled bank account that was
used to misappropriate customer funds.  None of these transactions were subjected to any
meaningful procedures to ascertain the purpose of these transactions.

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38. Instead, the engagement team relied wholly on (i) FTX management’s assertion
that the receivable related to a “treasury management agreement” between the two entities, and
(ii) a statement by Bankman-Fried on April 2, 2022 confirming that $1.2 billion was the correct
amount owed by Alameda to FTX as of December 31, 2021.

Ex. 4  Confirmation of Alameda Related Party Receivable Balance, Signed by Bankman-
Fried on Behalf of Alameda.  Red markings were added by Prager Metis during the
audit process.

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39. Thus, Prager Metis relied on another document signed by Bankman-Fried, this
time on behalf of Alameda, to support a significant factual representation, and inquired no
further into the borrowing.
40. On April 2, 2022, FTX issued its 2021 financial statements, again accompanied
by an audit report from Prager Metis.  Once again, the audit report stated Prager Metis’s opinion
that the Financial Statements and notes presented fairly, in all material respects, the financial
position of FTX in accordance with GAAP.  Prager Metis again stated that:  “We conducted our
audit in accordance with auditing standards generally accepted in the United States of America.”
And the audit report was again signed in the name of Prager Metis, with the authorization of the
Engagement Partner.
41. Prager Metis and the Engagement Partner knew or should have known that FTX
continued to raise money from equity investors in 2022.  Moreover, Prager Metis’s statements
regarding the audits were material to equity investors, who generally consider the existence of
properly audited financial statements as part of the information they consider in determining
whether to invest in a company’s securities.
42. Prager Metis and the Engagement Partner continued to engage periodically with
FTX and began discussing internally how to market the relationship in order to grow Prager
Metis’s business working with companies in the crypto industry.  They highlighted their
experience in working with crypto companies on the Prager Metis website, including on the
profile pages for certain partners.  In May 2022, the Engagement Partner began working with the
Prager Metis marketing team to update the firm’s crypto-related marketing materials, in advance
of a “huge crypto conference upcoming.”  He noted that Bankman-Fried was “one of the major
influences in the crypto currency arena and we need to leverage our relationship with him.”

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43. In late August 2022, Prager Metis contacted FTX to begin planning for the audit
of FTX’s 2022 financial statements.
C. FTX Collapsed in November 2022.
44. In early November 2022, after a series of public statements, customer
withdrawals, and frantic fundraising attempts, FTX collapsed.  On November 11, 2022,
Bankman-Fried resigned from FTX.  Shortly thereafter, FTX and approximately 100 affiliated
entities, including Alameda, filed for Chapter 11 bankruptcy protection.
45. Prager Metis quickly moved to distance itself from the FTX engagement.
References to the firm’s crypto asset market engagements and experience were removed from the
firm’s website.
46. Prager Metis senior management also reviewed the audit documentation from the
FTX engagement and determined that neither the 2019/2020 nor the 2021 audit file had been
officially finalized in the audit software program.  A number of individual workpapers contained
no evidence of review by the Engagement Partner, and other workpapers contained open
comments, with no evidence that the questions raised had been addressed.  One purportedly final
workpaper—documenting the purchase price accounting for the single largest asset on FTX’s
fiscal year 2020 balance sheet—contained content cut-and-pasted from work performed on an
entirely different Prager Metis client.  After management reviewed the files in November 2022,
and realized that the electronic audit files had not been closed as required, they instructed the
Engagement Partner to close the audit workpapers related to the FTX engagement.
47. Government agencies, including the SEC, the Commodity Futures Trading
Commission, and the Department of Justice, investigated FTX and its principals.  Bankman-
Fried was charged in December 2022 by the SEC, the Commodity Futures Trading Commission,
and the Department of Justice.  The SEC specifically alleged that, among other things,

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unbeknownst to FTX’s equity investors (and FTX’s customers), from May 2019 through
November 2022, Bankman-Fried, along with other FTX and Alameda executives, was
orchestrating a massive, years-long fraud, diverting billions of dollars of the trading platform’s
customer funds—largely through Alameda—for his own personal benefit and to help grow his
crypto empire.
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II. Prager Metis’s Claims that the Audits Were Conducted in Accordance with
Generally Accepted Auditing Standards Were Not True.

A. Generally Accepted Auditing Standards Applied to Prager Metis and to
the Engagement Partner.
48. Prager Metis’s audits of FTX’s financial statements were governed by GAAS.
GAAS is developed by the American Institute of Certified Public Accountants (“AICPA”)
Auditing Standards Board, and is issued in the form of Statements on Auditing Standards, which
are codified into sections referred to as “AU-C” sections.  AU-C § 200.02.
49. The purpose of a GAAS audit is to provide the users of financial statements with
the auditor’s opinion on whether the financial statements are presented fairly, in all material
respects, in accordance with the applicable framework.  AU-C § 200.06.  Compliance with
GAAS is what enables an auditor to form the opinion as to whether the financial statements are
presented fairly.  Id.  GAAS contains both specific objectives and requirements, and the general
requirement that an auditor exercise professional judgment and maintain professional skepticism
throughout the planning and performance of an audit.  AU-C § 200.08.
4

3
 Bankman-Fried was charged by the Commission on December 13, 2022, in SEC v. Samuel Bankman-Fried, 22-cv-
10501 (S.D.N.Y.).  In the parallel criminal case, Bankman-Fried was convicted at trial of three counts of wire fraud,
conspiracy to commit wire fraud, conspiracy to commit securities fraud, conspiracy to commit commodities fraud,
and conspiracy to commit money laundering.  See United States v. Bankman-Fried, 22-cr-0673 (S.D.N.Y.).

4
 GAAS defines professional judgment as “[t]he application of relevant training, knowledge, and experience, within
the context provided by auditing, accounting, and ethical standards, in making informed decisions about the courses
of action that are appropriate in the circumstances of the audit engagement.”  AU-C § 200.14.  GAAS defines

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50. GAAS itself requires that an auditor conduct an audit in accordance with GAAS,
by understanding and complying with all relevant AU-C sections.  AU-C §§ 200.20, .21.  GAAS
requires that an auditor should not represent compliance with GAAS in the auditor’s report
unless the auditor has in fact complied with the relevant requirements.  AU-C § 200.22.
51. Compliance with a firm’s system of quality control when conducting an audit of
financial statements is a foundational requirement in GAAS.  See generally AU-C § 220.
52. It is the responsibility of the audit firm to ensure that quality control systems,
policies, and procedures are in place.  AU-C § 220.03.  Specifically, GAAS provides that an
audit firm has, pursuant to guidance provided under the Statements on Quality Control Standards
(“SQCS” or “QC”), “an obligation to establish and maintain a system of quality control to
provide it with reasonable assurance that (a) the firm and its personnel comply with professional
standards and applicable legal and regulatory requirements and (b) reports issued by the firm are
appropriate in the circumstances.”  AU-C § 220.03, discussing QC §§ 10.01, .03, and .12.
53. GAAS also recognizes that an auditor is subject to relevant ethical requirements
relating to financial statement audit engagements, including those promulgated by the AICPA
Code of Professional Conduct.  AU-C §§ 200 A.15, A.16.
54. During the relevant period, Prager Metis had a number of quality control policies
and procedures in place and was aware of its responsibility to obtain reasonable assurance that its
auditors, including the FTX engagement team, were complying with professional standards,
including GAAS and the AIPCA Code of Professional Conduct.  QC §§ 10.01, .03, .04, .05, .13,
and .21.  But Prager Metis failed to adequately meet its responsibility to maintain, implement,
and monitor compliance with those policies and procedures.  As a result of the deficiencies in the

professional skepticism as “[a]n attitude that includes a questioning mind, being alert to conditions that may indicate
possible misstatement due to fraud or error, and a critical assessment of audit evidence.”  AU-C § 200.14.

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maintenance, implementation, and monitoring of the firm’s quality control systems, Prager Metis
failed to prevent or detect the Engagement Partner’s failures to comply with GAAS, as described
further below.  Thus, Prager Metis’s statement in its audit reports—“We conducted our audits in
accordance with auditing standards generally accepted in the United States of America”—was
both material to investors and not true.
55. The GAAS failures included both the overarching failures to apply professional
skepticism and professional judgment and to act with due care, as well as specific failures in
interrelated areas, including:  (1) client acceptance, (2) engagement staffing, (3) audit planning
and execution, and (4) audit documentation.
B. Prager Metis Violated GAAS When It Accepted an Engagement to Audit
FTX’s Financial Statements, a Client It Did Not Adequately Understand.
56. Prager Metis’s initial acceptance of the FTX engagement was a foundational
failure of GAAS that led to the other failures.  A threshold requirement of auditing professional
standards is that an auditor and audit firm not accept an engagement unless the firm has the
competence and capabilities to do so.  Specifically, the quality control standards provide that
audit firms should undertake new audit engagements—and continue preexisting ones—only
when the firm is competent to perform the engagement and has the capabilities, including the
time and resources, to do so.  QC § 10.27.
57. During the relevant period, Prager Metis had a client acceptance policy in place
that mirrored this standard, which stated that Prager Metis “will accept and continue only client
relationships and specific engagements when it has determined that the requisite competence and
capabilities (including adequate time and resources) exist within the Firm to perform the
engagement.”
58. Moreover, the Engagement Partner was specifically required under GAAS to

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undertake this analysis before accepting the engagement.  AU-C § 220.14.  (“The engagement
partner should be satisfied that appropriate procedures regarding the acceptance and continuance
of client relationships and audit engagements have been followed and should determine that
conclusions reached in this regard are appropriate.”); see also AU-C § 220.17 (“The engagement
partner should take responsibility for ... [t]he direction, supervision, and performance of the
audit engagement in compliance with professional standards, applicable legal and regulatory
requirements, and the firm’s policies and procedures.”).
59. As described above, however, Prager Metis failed to effectively implement its
own policies and procedures for client acceptance and failed to detect the Engagement Partner’s
lack of compliance with GAAS.  There was never an adequate assessment of whether the
Engagement Partner and the engagement team were competent to perform the audit.  Instead,
despite individuals voicing concerns, including to the Engagement Partner, the audit simply
proceeded.
60. Prager Metis partners had concerns that they expressed to each other and/or to the
Engagement Partner directly regarding the Engagement Partner’s capabilities, the firm’s
resources to conduct the audit, the timing of the audit, and FTX-specific issues.  But the concerns
were never adequately addressed.  Instead, the Engagement Partner pushed ahead with the client
acceptance process as if it were a formality, securing the engagement and beginning work
without conducting a reasonable analysis of the competence and capabilities of the engagement
team to conduct the audit, in direct violation of GAAS.
C. The Prager Metis Team Lacked the Competence and Capabilities to
Undertake the Audit But Did So Anyway, in Violation of GAAS.
61. The lack of meaningful analysis at the client acceptance stage was itself a
significant failure because, had an adequate analysis been done, it would have been clear that

21
both the Engagement Partner and the engagement team lacked the competence to conduct the
audit.
62. The Engagement Partner was required by GAAS to conduct the audit with due
care, which required him to have the appropriate competence and capabilities to perform the
work.  AU-C § 200A.19 (“Due care requires the auditor to discharge professional responsibilities
with competence and to have the appropriate capabilities to perform the audit and enable an
appropriate auditor’s report to be issued.”).  GAAS acknowledges that due care is a fundamental
principle of professional ethics under the AIPCA Code of Professional Conduct.  AU-C
§ 200A.16.
63. Prager Metis was required to comply with GAAS through establishing quality
control policies and procedures to ensure that the Engagement Partner had the appropriate
competence, capabilities, and authority to perform the audit.  AU-C § 220.03; QC §§ 10.33b,
10.34a; see also QC § 10.A11 (“Consideration of whether the firm has the competence,
capabilities, and resources to undertake a new engagement ... involves reviewing the specific
requirements of the engagement ... including whether firm personnel have knowledge of
relevant industries or subject matters or the ability to effectively gain the necessary knowledge.”)
64. Despite these requirements, the Engagement Partner proceeded without exercising
due care, conducting an audit he lacked the competence to lead.  And Prager Metis failed to
prevent him from doing so, allowing the Engagement Partner to proceed without properly
assessing whether the assembled engagement team had the required competence, capabilities,
and resources.
65. As described above, the Engagement Partner lacked even a basic understanding of
crypto assets, and how that technology operated in connection with the FTX trading platform.

22
And while he brought on contractors intended to address his lack of relevant experience and
knowledge regarding the crypto asset industry and crypto trading platforms, the Engagement
Partner still had the responsibility under GAAS for the direction, supervision, and performance
of the audit engagement to ensure it was conducted in compliance with professional standards,
applicable legal and regulatory requirements, and the firm’s policies and procedures.  AU-C
§ 220.17.  But because he himself did not gain a reasonable understanding of how FTX operated
or how crypto technology worked in general, the Engagement Partner could not effectively
supervise members of his engagement team.
66. The Engagement Partner thus failed to exercise due care, in violation of GAAS,
by moving forward with the audit of FTX’s financial statements, and Prager Metis failed to
implement and monitor its policies and procedures to ensure that the Engagement Partner and
team had the competence and capabilities to perform the engagement.
D. In Violation of GAAS, Prager Metis Failed to Design and Execute an
Audit that Appropriately Assessed the Risks of Material Misstatements.
67. The decision to take on a client they did not understand and lacked the
competence to audit then led to additional GAAS violations by Prager Metis at the design and
execution phases of the audit.  This included both overarching failures and specific failures.
68. The overarching failure, which ran throughout the design and execution process,
was the failure of the Engagement Partner and the engagement team to exercise professional
judgment and to perform the audit with professional skepticism, in violation of GAAS.  AU-C
§§ 200.17, 200.18.  As a result, the auditors did not have the basis to form the opinion that the
financial statements were presented fairly, in all material respects, in accordance with GAAP, as
required by GAAS.  AU-C § 200.04.
69. The auditing flaws in the design and execution stage can again be traced back to

23
the Engagement Partner’s fundamental lack of understanding of FTX and the crypto asset
markets more broadly.  GAAS specifically requires that, in order to design and perform audit
procedures that identify and assess the risks of material misstatement, an auditor has to
understand the entity and its environment.  AU-C § 315.  Among other relevant requirements, an
auditor is required to understand relevant industry, regulatory, and other external factors; the
nature of the entity and its operations; and the way it is structured.  AU-C § 315.12.
70. As discussed above, the Engagement Partner failed to understand crypto asset
markets, crypto asset trading platforms, and FTX as an entity.  He failed to exercise professional
judgment in even taking on the engagement.  He failed to educate himself about the industry and
the entity in order to develop the knowledge he needed to understand how to design and execute
the audit.  As a result, he failed to understand significant issues relating to FTX’s financial
statements.
71. The failure to understand FTX was also evident in the failure to obtain an
understanding of “the control activities relevant to the audit ... [which are those] necessary to
understand in order to assess the risks of material misstatement,” as specifically required under
GAAS.  AU-C § 315.21.  It was evident from the start of the audit that the individuals running
both FTX and Alameda lacked significant business experience, and the engagement team knew
or should have known that the corporate structure was loose and informal.  But the engagement
team failed to exercise professional skepticism or professional judgment in considering FTX’s
control environment in its risk assessment process.
72. As discussed above, the most impactful aspect of the Engagement Partner’s
failure to understand FTX was his failure to understand FTX’s relationship with Alameda.
GAAS specifically recognizes that, in exercising professional judgment about significant risks,

24
an auditor should give special consideration to related party relationships and transactions. AU-C
§§ 315.29, 550.  And, as noted above, the issue of FTX-related parties was flagged by a Prager
Metis partner before the engagement even officially commenced, when he noted that there
appeared to be significant related party transactions that had not been booked.  GAAS
specifically notes that “related party transactions may be motivated solely or in large measure to
engage in fraudulent financial reporting or conceal misappropriation of assets.”  AU-C § 550.03.
73. GAAS explains why understanding related party relationships and transactions
are so important to an audit:  “Because related parties are not independent of each other,
financial reporting frameworks establish specific accounting and disclosure requirements for
related party relationships, transactions, and balances to enable users of the financial statements
to understand their nature and actual or potential effects on the financial statements.  Therefore,
the auditor has a responsibility to perform audit procedures to identify, assess, and respond to the
risks of material misstatement arising from the entity’s failure to appropriately account for or
disclose related party relationships, transactions, or balances.”  AU-C § 550.04.  “In addition, an
understanding of the entity’s related party relationships and transactions is relevant to the
auditor’s evaluation of whether one or more fraud risk factors are present ... because fraud may
be more easily committed through related parties.” AU-C § 550.05.
74. Moreover, GAAS specifically recognizes that planning and performing an audit
with professional skepticism is particularly important in the context of related party transactions,
given the potential for undisclosed related party relationships and transactions.  AU-C § 550.07.
75. Despite these specific requirements, which make explicit the importance of
applying the concept of professional skepticism in analyzing related party transactions, the
Engagement Partner and engagement team failed to adequately assess the risk of material

25
misstatement arising from the relationship between Alameda and FTX.  The team memorialized
the information regarding Alameda’s borrowing in a perfunctory, one-line document.  In
addition, the team accepted without further investigation agreements that were signed by
Bankman-Fried on behalf of both FTX and Alameda, and a one-page document that essentially
amounted to an I.O.U. between the two companies, both owned by Bankman-Fried.
76. Professional skepticism calls for a questioning mind, but the engagement team
appears to have simply accepted these representations and documents at face value.  Similarly,
the large and exponentially increasing transactions between FTX and Alameda, including in
large round-value numbers, were accepted by the engagement team without meaningful inquiry
or re-engaging in the risk assessment process.  Because Prager Metis failed to design and execute
an audit that appropriately assessed the risks of material misstatements, it failed to obtain the
sufficient appropriate audit evidence necessary to support its opinions that FTX’s financial
statements were presented fairly, in all material respects, in compliance with GAAP.
Accordingly, the firm’s representation in its audit report that it complied with GAAS was not
true.
E. Prager Metis Failed to Properly Document the Purportedly Completed
Audits, in Violation of GAAS.
77. Prager Metis’s failure to meet its professional responsibilities continued through
November 2022.  GAAS requires audit documentation to be finalized within 60 days of the date
of the release of the report.  AU-C § 230.16.  And the firm is required under the SQCS to
establish policies and procedures for engagement teams to complete the assembly of final
engagement files on a timely basis after the engagement reports have been released.  QC § 10.49.
78. But once again, while Prager Metis had quality control policies and procedures in
place that required its engagement teams to comply with GAAS, the FTX engagement team did

26
not do so, and the firm failed to implement its own policies to ensure compliance.  As described
above, the electronic process of closing the audit workpapers for both audits were finalized only
after FTX collapsed, in November 2022.
79. In addition, the overall nature of the audit documentation itself—for example, the
open comments and the cut-and-paste response—exhibited a lack of due care on the part of the
Engagement Partner and the firm, in violation of GAAS.  AU-C § 200.16.
80. Thus, from the inception to the end, Prager Metis’s audits of FTX failed to
comply with GAAS, and its statements to the contrary in the audit reports were not true.
FIRST CLAIM FOR RELIEF
NEGLIGENCE-BASED FRAUD IN THE OFFER OR SALE OF SECURITIES
(Violations of Sections 17(a)(2) and (3) of the Securities Act)
81. The Commission re-alleges and incorporates by reference the allegations
contained in paragraphs 1 through 80.
82. By reason of the conduct described above, on or about July 30, 2021, Defendant,
in connection with the offer or sale of securities, by the use of the means or instrumentalities of
interstate commerce or of the mails, directly or indirectly, acting negligently, (i) obtained money
or property by means of an untrue statement of a material fact; and (ii) engaged in acts, practices,
or courses of business which operated or would operate as a fraud or deceit upon any persons,
including purchasers or sellers of the securities.
83. By reason of the conduct described above, Defendant violated Securities Act
Sections 17(a)(2) and (a)(3) [15 U.S.C. §§ 77q(a)(2) and (a)(3)].

27
SECOND CLAIM FOR RELIEF
NEGLIGENCE-BASED FRAUD IN THE OFFER OR SALE OF SECURITIES
(Violations of Sections 17(a)(2) and (3) of the Securities Act)
84. The Commission re-alleges and incorporates by reference the allegations
contained in paragraphs 1 through 80.
85. By reason of the conduct described above, Defendant, on or about April 2, 2022,
in connection with the offer or sale of securities, by the use of the means or instrumentalities of
interstate commerce or of the mails, directly or indirectly, acting negligently, (i) obtained money
or property by means of an untrue statement of a material fact; and (ii) engaged in acts, practices,
or courses of business which operated or would operate as a fraud or deceit upon any persons,
including purchasers or sellers of the securities.
86. By reason of the conduct described above, Defendant violated Securities Act
Sections 17(a)(2) and (a)(3) [15 U.S.C. §§ 77q(a)(2) and (a)(3)].
PRAYER FOR RELIEF
WHEREFORE, the Commission respectfully requests that this Court enter a Final
Judgment:
A. Permanently restraining and enjoining Defendant, its officers, agents, servants,
employees and attorneys, and those persons in active concert or participation with it who receive
actual notice of the injunction by personal service or otherwise, and each of them, from violating
Sections 17(a)(2) and (a)(3) of the Securities Act [15 U.S.C. §§ 77q(a)(2) and (a)(3)];
B. Ordering Defendant to pay civil monetary penalties pursuant to Section 20(d) of
the Securities Act [15 U.S.C. § 77t(d)]; and
C. Granting such other and further relief as this Court may deem just and proper.

28

JURY DEMAND
The Commission demands trial by jury.
DATED: September 17, 2024

                                                                                    Respectfully            submitted,

       /s/ Amy Harman Burkart
Amy Harman Burkart
David J. D’Addio
SECURITIES AND EXCHANGE
                        COMMISSION
Attorneys for the Plaintiff

Of Counsel
Jorge G. Tenreiro
Michael Brennan
Amy Flaherty Hartman
Devlin Su

UNITED STATES DISTRICT COURT 
SOUTHERN DISTRICT OF NEW YORK 

___________________________________________ 
) 

SECURITIES AND     )  
EXCHANGE COMMISSION,   ) 
       )   

Plaintiff,   )  Civil Action No. 24-CV-7025 
)   

v.      ) 
      ) JURY TRIAL DEMANDED  

PRAGER METIS CPAs, LLC,    ) 
       )  
   Defendant.   )   
___________________________________________ ) 
 

COMPLAINT 

Plaintiff Securities and Exchange Commission (the “Commission” or “SEC”), for its 

complaint against Prager Metis CPAs, LLC (“Prager Metis” or “Defendant”), alleges as follows:    

SUMMARY 

1. In February 2021, Prager Metis undertook an audit of the financial statements of 

FTX, then one of the world’s largest crypto asset trading platforms.1  Less than two years later, 

in November 2022, FTX collapsed, wiping out billions in investor equity and billions more in 

misappropriated customer deposits.  

2. Prager Metis was aware at the time that it began the engagement that FTX was 

raising funds from equity investors, and that FTX intended to become a publicly traded 

company.  Prager Metis issued two audit reports—in July 2021 and April 2022—stating that the 

firm had conducted audits of the FTX financial statements, and that it had done so in accordance 

with generally accepted auditing standards.  These statements were material to FTX equity 

investors in connection with FTX’s offer and sale of equity securities.  And Prager Metis knew 

 
1 As described in paragraph 13, FTX refers to FTX Trading Ltd. and various subsidiary entities, including FTX 
Digital Markets Ltd., a Bahamas company.   

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2 

or should have known that the statements were not true:  its audits of FTX were not in fact 

conducted in accordance with Generally Accepted Auditing Standards (“GAAS”).      

3. The foundational failure to meet GAAS stemmed from the fact that the Prager 

Metis engagement partner fundamentally did not understand FTX, or the crypto asset markets in 

which it operated.  In its rush to accept FTX as an audit client, Prager Metis assembled an 

engagement team that collectively lacked the competence, experience, and knowledge to 

appropriately conduct the audits.  From this initial failure flowed a series of other auditing 

failures in the design and execution of the audits.  These failures resulted in the issuance of audit 

reports that each contained an opinion that FTX’s financial statements presented fairly, in all 

material respects, the financial position of FTX and its subsidiaries in accordance with 

accounting principles generally accepted in the United States of America (Generally Accepted 

Accounting Principles or “GAAP”).  But, due to the auditing failures, Prager Metis lacked 

sufficient appropriate audit evidence to support those opinions.    

4. The most significant deficiency was Prager Metis’s failure to understand FTX’s 

relationship with Alameda Research LLC (“Alameda”) (the trading firm belonging to FTX’s 

founder and owner Sam Bankman-Fried) and the pivotal role Alameda played in FTX’s business.  

Despite the interconnected nature of the companies and the significant financial transactions 

between them, Prager Metis and the audit engagement team failed to adequately assess the risk 

of material misstatement presented by the FTX-Alameda relationship.  As a result, the audit plan 

and procedures largely excluded Alameda.  Ultimately, the FTX-Alameda relationship was at the 

heart of the misappropriation of billions of dollars of FTX customer assets that led to the collapse 

of FTX in November 2022. 

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3 

VIOLATIONS 

5. By engaging in the conduct set forth in this Complaint, Defendant violated 

Sections 17(a)(2) and (3) of the Securities Act of 1933 (“Securities Act”) [15 U.S.C. 

§§ 77q(a)(1) and (3)]. 

6. Unless Defendant is permanently restrained and enjoined, it may continue to 

engage in the acts, practices, transactions, and courses of business set forth in this Complaint and 

in acts, practices, transactions, and courses of business of similar type and object. 

NATURE OF THE PROCEEDING AND RELIEF SOUGHT 

7. The Commission brings this action pursuant to the authority conferred upon it by 

Section 20(b) of the Securities Act [15 U.S.C. § 77t(b)].  

8. The Commission seeks a final judgment:  (i) permanently enjoining Defendant 

from engaging in the acts, practices, transactions and courses of business alleged herein; 

(ii) imposing civil money penalties on Defendant pursuant to Section 20(d) of the Securities Act; 

and (iii) ordering such other and further relief the Court may find appropriate.   

JURISDICTION AND VENUE 

9. This Court has jurisdiction over this action pursuant to Sections 20(b), 20(d), and 

22 of the Securities Act [15 U.S.C. §§ 77t(b), 77t(d), and 77v].  In connection with the conduct 

alleged in this Complaint, Defendant, directly or indirectly, made use of the means or 

instruments of transportation or communication in, and the means or instrumentalities of, 

interstate commerce, or of the mails. 

10. Venue is proper in the Southern District of New York pursuant to Section 22(a) of 

the Securities Act [15 U.S.C. § 77v(a)].  Specifically, one or more investors in FTX obtained 

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4 

information regarding the audit of FTX’s financial statements from Prager Metis while located in 

the Southern District of New York.   

DEFENDANT 

11. Prager Metis CPAs, LLC is an accounting and auditing firm headquartered in 

New York, New York, which has been registered with the Public Company Accounting 

Oversight Board (“PCAOB”) since 2003.  Prager Metis provides accounting, auditing, 

consulting, and tax services to a variety of companies, including public issuers whose securities 

are registered with the Commission and trade in the U.S. markets.  

RELEVANT PARTIES AND ENTITIES 

12. The “Engagement Partner” was, at all relevant times, a Prager Metis equity 

partner auditing the financial statements of public and private companies.  He was the lead audit 

partner, known as the engagement partner, for the Prager Metis audits of FTX’s financial 

statements.  At all relevant times, the Engagement Partner was acting within the scope of his 

employment.   

13. FTX Trading Ltd. (d/b/a FTX.com) is an Antigua and Barbuda limited 

corporation.  FTX Trading Ltd. and its subsidiary entities, including FTX Digital Markets Ltd. (a 

Bahamas company), are referred to collectively as “FTX.”  FTX’s principal place of business 

was in Hong Kong and The Bahamas.  FTX operated a global crypto asset trading platform and 

began operations in or around May 2019.  FTX was available to customers in most countries, but 

stated that it would not provide services to customers in the United States and several other 

countries.  On or about November 11, 2022, FTX and certain of its affiliates filed Chapter 11 

bankruptcy petitions in the United States Bankruptcy Court for the District of Delaware.2    

 
2 FTX US is the d/b/a for a subsidiary of West Realm Shires Inc., a separate legal entity from FTX Trading Ltd. that 
provided different services, including to US customers.  FTX US’s conduct is not the subject of this complaint.   

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5 

14. Alameda Research LLC is a Delaware company that had operations in the 

United States, Hong Kong, and The Bahamas.  Alameda Research LLC and its subsidiaries, 

including Alameda Research Ltd. (a British Virgin Islands company), are collectively referred to 

herein as “Alameda.”  Alameda was a quantitative trading firm specializing in crypto assets.  

With FTX, Alameda filed for Chapter 11 bankruptcy in the United States Bankruptcy Court for 

the District of Delaware, Case No. 22-11068 (Bankr. Del.). 

FACTS 

I. Prager Metis Audited the FTX Financial Statements. 

A. Prager Metis Accepted the FTX Audit Engagement. 

15. The Prager Metis Engagement Partner was introduced to Bankman-Fried in late 

January 2021.  Bankman-Fried and the FTX team had been unsuccessful in their prior attempts 

to identify a firm that was willing to audit FTX’s financial statements, and they were eager to 

obtain audited financial statements to support their plan of engaging in a public offering (which 

would generally require audited financial statements).  FTX was also conducting private 

fundraising rounds with equity investors, who were also seeking audited financial statements as 

part of their diligence process.   

16. The engagement moved forward quickly, with a “kick-off” meeting on or about 

February 8, 2021, before the internal Prager Metis client acceptance process was finalized.  FTX 

sought to have the audit completed and an audit report released by April 2021 for its financial 

statements covering part of 2019 (from April 2019, when FTX began operations, to December 

2019) and all of 2020.  The Engagement Partner began assembling an engagement team, while 

pushing the internal Prager Metis client acceptance process forward toward completion.   

17. During the internal client acceptance process, Prager Metis partners raised 

concerns to each other and the Engagement Partner about Prager Metis taking on a complicated, 

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6 

first-time audit of a crypto industry client on an accelerated schedule, particularly at a time of 

year when their resources were heavily utilized (their “busy season”).  Prager Metis partners also 

noted that taking on FTX as a client would be a high-risk engagement, that the firm lacked 

sufficient experience auditing crypto industry companies (and trading platforms in particular), 

and that they understood from FTX that its internal financial reporting function was virtually 

nonexistent.  One Prager Metis partner emailed the Engagement Partner after the initial meeting 

with FTX noting that there appeared to be billions of dollars in unrecorded assets, that the 

financial statement information that had been circulated before the meeting appeared to be 

inaccurate, and that there were significant related-party transactions that had not been booked.   

18. The Engagement Partner was undeterred by these concerns.  He acknowledged 

that staffing would be “somewhat on the fly,” but advocated for moving forward quickly.  The 

Engagement Partner brought in two outside contractors to assist with the audit, but they too 

lacked experience in auditing a crypto asset trading platform of the size and complexity of FTX.  

More importantly, they could not overcome the fundamental deficiencies in knowledge and 

competence of the Engagement Partner, who was ultimately responsible for directing and 

supervising their work. 

19. Prager Metis partners also raised questions specifically about the qualifications of 

the Engagement Partner to lead the engagement, and it was acknowledged that he had only 

recently developed limited experience in the industry.  But despite this awareness, Prager Metis 

never conducted an adequate assessment of the Engagement Partner’s capabilities.  The firm thus 

failed to identify that the Engagement Partner was not competent to audit a large, complex crypto 

asset trading platform.  He did not understand the basic technology behind crypto assets or the 

crypto asset industry.  He lacked basic knowledge about foundational concepts, including crypto 

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7 

wallets and blockchain technology.  He lacked knowledge of basic terminology regarding crypto 

assets.  He lacked an understanding of the functionality of crypto asset trading platforms.  And 

he had no awareness of prior, widely publicized, instances of crypto asset industry failures and 

frauds. 

20. Despite policies and procedures at Prager Metis that were designed to evaluate 

new client engagements, particularly those that were deemed high-risk, and even though 

questions and concerns had been raised internally from the initial stages, Prager Metis accepted 

FTX as a client.   

21. On February 17, 2021, FTX signed the engagement letter and formally engaged 

Prager Metis as its independent auditor for its financial statements encompassing fiscal year 

2020 and April to December of 2019.   

B. Prager Metis Conducted Two Audits of FTX’s Financial Statements. 

22. The Prager Metis team conducted a series of video calls and obtained documents 

from FTX from February 2021 through July 2021.  The Prager Metis team ultimately met, via 

video call, multiple members of the FTX team, including Bankman-Fried and Nishad Singh, who 

was initially Head of Engineering at Alameda and then became Head of Engineering at FTX, 

while retaining his role and title at Alameda.  The Engagement Partner had the opportunity to 

observe that the founders and senior leaders of FTX lacked significant business experience.  He 

also had the opportunity to observe that the corporate structure at FTX was loose and informal.   

23. As discussed further below, the Engagement Partner was responsible for 

designing and implementing audit procedures that identified the risks of material misstatements 

in the FTX financial statements.  But because he did not understand FTX, or the crypto asset 

industry generally, he failed to adequately assess the risks of material misstatements, and thus 

failed to design and implement audit procedures to obtain sufficient appropriate audit evidence to 

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8 

properly respond to those risks.  Significantly, the Engagement Partner failed to understand the 

relationship between FTX and Alameda, a related party, and the role that Alameda (and its 

employees) played in FTX’s business. 

24. The Engagement Partner knew or should have known that Alameda, a quantitative 

trading firm specializing in crypto assets, was founded and owned by Bankman-Fried and Gary 

Wang, who also founded FTX.  Until October 2021, Bankman-Fried was the CEO of both FTX 

and Alameda.  FTX and Alameda shared a number of employees and resources and had offices 

in the same location.  The Engagement Partner was aware of the interrelated nature of the two 

companies, and even believed—incorrectly—that FTX did not have any employees at all, but 

rather that all employees at FTX were actually Alameda employees.    

25. Prager Metis requested that FTX complete a “Related Party Questionnaire,” in 

which FTX disclosed certain services that Alameda provided to FTX, including a Payment Agent 

Agreement (in which an Alameda entity provided cash management services to FTX) and a 

Services Agreement (through which Alameda provided FTX with research and development 

services).  FTX provided documents that purported to memorialize these arrangements, which 

were executed, on behalf of both FTX and Alameda, by Bankman-Fried. 

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9 

 

Ex. 1 Final Page of Services Agreement Provided to Prager Metis by FTX 

 

Ex. 2 Final Page of Payment Agent Agreement Provided to Prager Metis by FTX 

26. Despite this and other information regarding the relationship between FTX and 

Alameda, Prager Metis lacked the basic understanding and competence required to evaluate the 

nature and scope of that relationship, and the potential impact on FTX’s financial statements and 

footnote disclosures.  

27. There were numerous instances in which the Prager Metis team assessed 

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10 

connections between FTX and Alameda in a cursory manner, without engaging in reasonable 

analysis of the related risks.  For instance, Prager Metis failed to understand and properly 

evaluate the risks posed by the fact that, during the periods covered by the financial statements 

Prager Metis audited, Alameda was a custodian of the cash deposited by FTX customers to fund 

their FTX trading accounts.  The Engagement Partner himself lacked a basic understanding of 

the flow of FTX customer funds, later explaining that he believed that FTX customers sent their 

cash (fiat currency) not into another bank account but rather directly “into the exchange” and 

“into the blockchain,” which is not an accurate understanding of either blockchain technology or 

the processes employed at FTX.   

28. FTX had provided Prager Metis documents that showed that FTX customers who 

wished to fund their trading accounts with cash instead of crypto assets were instructed to wire 

the money to Alameda’s bank accounts.  The engagement team thus had the information needed 

to plan an audit that included inquiries into the segregation and handling of those assets.  Those 

inquiries could have included, for example:  (1) whether the Alameda bank accounts holding 

FTX customer funds were custodial or “for the benefit of” accounts; (2) whether Alameda 

commingled FTX customer cash with its own cash; (3) how the custodial funds were reconciled 

to FTX’s internal ledger; (4) what, if any, internal controls or processes existed to ensure that 

Alameda was a proper custodian of these FTX customer funds; and (5) whether there was an 

actual custodial agreement between Alameda and FTX governing this relationship.  But the audit 

plan did not cover or address these issues.   

29. Moreover, because Prager Metis did not understand Alameda’s role as a purported 

custodian of cash belonging to FTX customers, its engagement team could not reasonably 

analyze FTX’s decision not to recognize its customers’ crypto assets or cash on its balance sheet.  

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11 

And because the Engagement Partner did not understand basic aspects of FTX’s business model, 

he failed to design an audit that included procedures to identify whether certain assets were 

appropriately recognized and presented in FTX’s financial statements, and if included, whether 

they contained sufficient footnote disclosure.   

30. FTX told Prager Metis that it loaned funds to Alameda, but the Prager Metis team 

did not design and execute sufficient procedures to obtain audit evidence for this activity.  

Instead, Prager Metis memorialized the limited audit evidence they collected on this issue with 

this one-line workpaper:   

 

Ex. 3 Prager Metis Workpaper Regarding Alameda Borrowing 

31. Prager Metis apparently inquired no further into the nature or extent of Alameda’s 

borrowing, taking at face value the statement that Alameda—the company Bankman-Fried 

owned and that served as the primary market maker for FTX—operated under terms that were no 

different than those that would apply to an individual customer purchasing a small amount of 

bitcoin on margin for the first time.  Prager Metis took no steps to consider the size of the overall 

borrowing arrangement or consider the potential risks of a borrowing arrangement with a related 

party.  And because Prager Metis failed to understand the extent of Alameda’s purported 

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borrowing of funds from FTX, the engagement team never understood or evaluated Alameda’s 

unique ability to borrow virtually unlimited amounts from FTX, and how that ability to borrow 

might affect the accuracy of FTX’s financial statements.  

32. Thus, because the Engagement Partner did not fundamentally understand FTX’s 

business, its relationship with Alameda, or the crypto asset industry as a whole, he could not—

and did not—develop and document an audit plan that adequately assessed the risks of material 

misstatement in the financial statements or update that plan as necessary during the audit.  The 

Engagement Partner’s lack of understanding about FTX and its relationship with Alameda, and 

the lack of professional skepticism regarding information that was provided regarding Alameda, 

effectively meant that—other than at a generally superficial level—Alameda was removed from 

the scope of the Prager Metis audit of FTX’s financial statements.   

33. On July 30, 2021, FTX issued its first Consolidated Financial Statements, which 

covered 2020 and a portion of 2019.  Prager Metis issued an accompanying Independent 

Auditor’s Report, stating its opinion that the Financial Statements presented fairly, in all material 

respects, the financial position of FTX in accordance with GAAP.  Prager Metis represented in 

the audit report that:  “We conducted our audits in accordance with auditing standards generally 

accepted in the United States of America.”  The Independent Auditor’s Report was signed in the 

name of Prager Metis, with the authorization of the Engagement Partner.  

34. The statements regarding the audits being conducted in compliance with GAAS 

were material to investors in the offering of equity investments in FTX.  In fact, during the audit, 

a member of the Prager Metis engagement team was asked to speak to several prospective FTX 

investors about Prager Metis’s audit, and did, in fact, speak to at least one prospective investor, 

in Manhattan.  Moreover, the Engagement Partner also knew, or should have known, that the 

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audit report and the financial statements would be made available to current and prospective 

equity investors in FTX after they were issued and provided to FTX.   

35. In January 2022, Prager Metis began the audit of FTX’s financial statements for 

the period ended December 31, 2021.  The engagement letter was signed on January 17, 2022.  

Prager Metis did not engage in a substantive review of the client continuation or analyze whether 

the engagement team had the competence to undertake another audit of FTX’s financial 

statements.    

36. The Prager Metis engagement team for the second audit was substantially the 

same as the prior team, led by the Engagement Partner, and followed the same deficient 

processes as the prior audit.  The engagement team continued to accept and rely on superficial 

documentation and information regarding the role of Alameda in FTX’s business.  The team 

used the same document describing Alameda’s borrowing as in the prior year.  See Ex. 3, supra.  

They did so despite the fact that Prager Metis had received information that, in 2021, the 

purported related party receivable balance due from Alameda to FTX had risen from $0 to $1.2 

billion.   

37. Despite the massive increase in that line item—indeed, $1.2 billion was 

approximately 44% of FTX’s total assets in 2021—the Prager Metis engagement team failed to 

perform sufficient transaction testing of this balance.  Prager Metis moreover had access to 

FTX’s account details, which indicated that this line item included several large, round-number 

transactions of hundreds of millions of dollars between FTX and Alameda.  These included two 

transactions of $400 million each, sent by FTX to an Alameda-controlled bank account that was 

used to misappropriate customer funds.  None of these transactions were subjected to any 

meaningful procedures to ascertain the purpose of these transactions.  

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38. Instead, the engagement team relied wholly on (i) FTX management’s assertion 

that the receivable related to a “treasury management agreement” between the two entities, and 

(ii) a statement by Bankman-Fried on April 2, 2022 confirming that $1.2 billion was the correct 

amount owed by Alameda to FTX as of December 31, 2021. 

 

Ex. 4  Confirmation of Alameda Related Party Receivable Balance, Signed by Bankman-
Fried on Behalf of Alameda.  Red markings were added by Prager Metis during the  

audit process. 
 

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39. Thus, Prager Metis relied on another document signed by Bankman-Fried, this 

time on behalf of Alameda, to support a significant factual representation, and inquired no 

further into the borrowing.   

40. On April 2, 2022, FTX issued its 2021 financial statements, again accompanied 

by an audit report from Prager Metis.  Once again, the audit report stated Prager Metis’s opinion 

that the Financial Statements and notes presented fairly, in all material respects, the financial 

position of FTX in accordance with GAAP.  Prager Metis again stated that:  “We conducted our 

audit in accordance with auditing standards generally accepted in the United States of America.”  

And the audit report was again signed in the name of Prager Metis, with the authorization of the 

Engagement Partner. 

41. Prager Metis and the Engagement Partner knew or should have known that FTX 

continued to raise money from equity investors in 2022.  Moreover, Prager Metis’s statements 

regarding the audits were material to equity investors, who generally consider the existence of 

properly audited financial statements as part of the information they consider in determining 

whether to invest in a company’s securities. 

42. Prager Metis and the Engagement Partner continued to engage periodically with 

FTX and began discussing internally how to market the relationship in order to grow Prager 

Metis’s business working with companies in the crypto industry.  They highlighted their 

experience in working with crypto companies on the Prager Metis website, including on the 

profile pages for certain partners.  In May 2022, the Engagement Partner began working with the 

Prager Metis marketing team to update the firm’s crypto-related marketing materials, in advance 

of a “huge crypto conference upcoming.”  He noted that Bankman-Fried was “one of the major 

influences in the crypto currency arena and we need to leverage our relationship with him.”   

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16 

43. In late August 2022, Prager Metis contacted FTX to begin planning for the audit 

of FTX’s 2022 financial statements.   

C. FTX Collapsed in November 2022. 

44. In early November 2022, after a series of public statements, customer 

withdrawals, and frantic fundraising attempts, FTX collapsed.  On November 11, 2022, 

Bankman-Fried resigned from FTX.  Shortly thereafter, FTX and approximately 100 affiliated 

entities, including Alameda, filed for Chapter 11 bankruptcy protection. 

45. Prager Metis quickly moved to distance itself from the FTX engagement.  

References to the firm’s crypto asset market engagements and experience were removed from the 

firm’s website.   

46. Prager Metis senior management also reviewed the audit documentation from the 

FTX engagement and determined that neither the 2019/2020 nor the 2021 audit file had been 

officially finalized in the audit software program.  A number of individual workpapers contained 

no evidence of review by the Engagement Partner, and other workpapers contained open 

comments, with no evidence that the questions raised had been addressed.  One purportedly final 

workpaper—documenting the purchase price accounting for the single largest asset on FTX’s 

fiscal year 2020 balance sheet—contained content cut-and-pasted from work performed on an 

entirely different Prager Metis client.  After management reviewed the files in November 2022, 

and realized that the electronic audit files had not been closed as required, they instructed the 

Engagement Partner to close the audit workpapers related to the FTX engagement.   

47. Government agencies, including the SEC, the Commodity Futures Trading 

Commission, and the Department of Justice, investigated FTX and its principals.  Bankman-

Fried was charged in December 2022 by the SEC, the Commodity Futures Trading Commission, 

and the Department of Justice.  The SEC specifically alleged that, among other things, 

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unbeknownst to FTX’s equity investors (and FTX’s customers), from May 2019 through 

November 2022, Bankman-Fried, along with other FTX and Alameda executives, was 

orchestrating a massive, years-long fraud, diverting billions of dollars of the trading platform’s 

customer funds—largely through Alameda—for his own personal benefit and to help grow his 

crypto empire.3      

II. Prager Metis’s Claims that the Audits Were Conducted in Accordance with 
Generally Accepted Auditing Standards Were Not True.   
 

A. Generally Accepted Auditing Standards Applied to Prager Metis and to 
the Engagement Partner. 

48. Prager Metis’s audits of FTX’s financial statements were governed by GAAS. 

GAAS is developed by the American Institute of Certified Public Accountants (“AICPA”) 

Auditing Standards Board, and is issued in the form of Statements on Auditing Standards, which 

are codified into sections referred to as “AU-C” sections.  AU-C § 200.02.   

49. The purpose of a GAAS audit is to provide the users of financial statements with 

the auditor’s opinion on whether the financial statements are presented fairly, in all material 

respects, in accordance with the applicable framework.  AU-C § 200.06.  Compliance with 

GAAS is what enables an auditor to form the opinion as to whether the financial statements are 

presented fairly.  Id.  GAAS contains both specific objectives and requirements, and the general 

requirement that an auditor exercise professional judgment and maintain professional skepticism 

throughout the planning and performance of an audit.  AU-C § 200.08.4     

 
3 Bankman-Fried was charged by the Commission on December 13, 2022, in SEC v. Samuel Bankman-Fried, 22-cv-
10501 (S.D.N.Y.).  In the parallel criminal case, Bankman-Fried was convicted at trial of three counts of wire fraud, 
conspiracy to commit wire fraud, conspiracy to commit securities fraud, conspiracy to commit commodities fraud, 
and conspiracy to commit money laundering.  See United States v. Bankman-Fried, 22-cr-0673 (S.D.N.Y.).   
 
4 GAAS defines professional judgment as “[t]he application of relevant training, knowledge, and experience, within 
the context provided by auditing, accounting, and ethical standards, in making informed decisions about the courses 
of action that are appropriate in the circumstances of the audit engagement.”  AU-C § 200.14.  GAAS defines 

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18 

50. GAAS itself requires that an auditor conduct an audit in accordance with GAAS, 

by understanding and complying with all relevant AU-C sections.  AU-C §§ 200.20, .21.  GAAS 

requires that an auditor should not represent compliance with GAAS in the auditor’s report 

unless the auditor has in fact complied with the relevant requirements.  AU-C § 200.22.  

51. Compliance with a firm’s system of quality control when conducting an audit of 

financial statements is a foundational requirement in GAAS.  See generally AU-C § 220. 

52. It is the responsibility of the audit firm to ensure that quality control systems, 

policies, and procedures are in place.  AU-C § 220.03.  Specifically, GAAS provides that an 

audit firm has, pursuant to guidance provided under the Statements on Quality Control Standards 

(“SQCS” or “QC”), “an obligation to establish and maintain a system of quality control to 

provide it with reasonable assurance that (a) the firm and its personnel comply with professional 

standards and applicable legal and regulatory requirements and (b) reports issued by the firm are 

appropriate in the circumstances.”  AU-C § 220.03, discussing QC §§ 10.01, .03, and .12. 

53. GAAS also recognizes that an auditor is subject to relevant ethical requirements 

relating to financial statement audit engagements, including those promulgated by the AICPA 

Code of Professional Conduct.  AU-C §§ 200 A.15, A.16. 

54. During the relevant period, Prager Metis had a number of quality control policies 

and procedures in place and was aware of its responsibility to obtain reasonable assurance that its 

auditors, including the FTX engagement team, were complying with professional standards, 

including GAAS and the AIPCA Code of Professional Conduct.  QC §§ 10.01, .03, .04, .05, .13, 

and .21.  But Prager Metis failed to adequately meet its responsibility to maintain, implement, 

and monitor compliance with those policies and procedures.  As a result of the deficiencies in the 

 
professional skepticism as “[a]n attitude that includes a questioning mind, being alert to conditions that may indicate 
possible misstatement due to fraud or error, and a critical assessment of audit evidence.”  AU-C § 200.14. 

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maintenance, implementation, and monitoring of the firm’s quality control systems, Prager Metis 

failed to prevent or detect the Engagement Partner’s failures to comply with GAAS, as described 

further below.  Thus, Prager Metis’s statement in its audit reports—“We conducted our audits in 

accordance with auditing standards generally accepted in the United States of America”—was 

both material to investors and not true.   

55. The GAAS failures included both the overarching failures to apply professional 

skepticism and professional judgment and to act with due care, as well as specific failures in 

interrelated areas, including:  (1) client acceptance, (2) engagement staffing, (3) audit planning 

and execution, and (4) audit documentation. 

B. Prager Metis Violated GAAS When It Accepted an Engagement to Audit 
FTX’s Financial Statements, a Client It Did Not Adequately Understand.  

56. Prager Metis’s initial acceptance of the FTX engagement was a foundational 

failure of GAAS that led to the other failures.  A threshold requirement of auditing professional 

standards is that an auditor and audit firm not accept an engagement unless the firm has the 

competence and capabilities to do so.  Specifically, the quality control standards provide that 

audit firms should undertake new audit engagements—and continue preexisting ones—only 

when the firm is competent to perform the engagement and has the capabilities, including the 

time and resources, to do so.  QC § 10.27.   

57. During the relevant period, Prager Metis had a client acceptance policy in place 

that mirrored this standard, which stated that Prager Metis “will accept and continue only client 

relationships and specific engagements when it has determined that the requisite competence and 

capabilities (including adequate time and resources) exist within the Firm to perform the 

engagement.”   

58. Moreover, the Engagement Partner was specifically required under GAAS to 

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undertake this analysis before accepting the engagement.  AU-C § 220.14.  (“The engagement 

partner should be satisfied that appropriate procedures regarding the acceptance and continuance 

of client relationships and audit engagements have been followed and should determine that 

conclusions reached in this regard are appropriate.”); see also AU-C § 220.17 (“The engagement 

partner should take responsibility for … [t]he direction, supervision, and performance of the 

audit engagement in compliance with professional standards, applicable legal and regulatory 

requirements, and the firm’s policies and procedures.”). 

59. As described above, however, Prager Metis failed to effectively implement its 

own policies and procedures for client acceptance and failed to detect the Engagement Partner’s 

lack of compliance with GAAS.  There was never an adequate assessment of whether the 

Engagement Partner and the engagement team were competent to perform the audit.  Instead, 

despite individuals voicing concerns, including to the Engagement Partner, the audit simply 

proceeded.   

60. Prager Metis partners had concerns that they expressed to each other and/or to the 

Engagement Partner directly regarding the Engagement Partner’s capabilities, the firm’s 

resources to conduct the audit, the timing of the audit, and FTX-specific issues.  But the concerns 

were never adequately addressed.  Instead, the Engagement Partner pushed ahead with the client 

acceptance process as if it were a formality, securing the engagement and beginning work 

without conducting a reasonable analysis of the competence and capabilities of the engagement 

team to conduct the audit, in direct violation of GAAS.   

C. The Prager Metis Team Lacked the Competence and Capabilities to 
Undertake the Audit But Did So Anyway, in Violation of GAAS. 

61. The lack of meaningful analysis at the client acceptance stage was itself a 

significant failure because, had an adequate analysis been done, it would have been clear that 

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both the Engagement Partner and the engagement team lacked the competence to conduct the 

audit. 

62. The Engagement Partner was required by GAAS to conduct the audit with due 

care, which required him to have the appropriate competence and capabilities to perform the 

work.  AU-C § 200A.19 (“Due care requires the auditor to discharge professional responsibilities 

with competence and to have the appropriate capabilities to perform the audit and enable an 

appropriate auditor’s report to be issued.”).  GAAS acknowledges that due care is a fundamental 

principle of professional ethics under the AIPCA Code of Professional Conduct.  AU-C 

§ 200A.16.  

63. Prager Metis was required to comply with GAAS through establishing quality 

control policies and procedures to ensure that the Engagement Partner had the appropriate 

competence, capabilities, and authority to perform the audit.  AU-C § 220.03; QC §§ 10.33b, 

10.34a; see also QC § 10.A11 (“Consideration of whether the firm has the competence, 

capabilities, and resources to undertake a new engagement … involves reviewing the specific 

requirements of the engagement … including whether firm personnel have knowledge of 

relevant industries or subject matters or the ability to effectively gain the necessary knowledge.”)   

64. Despite these requirements, the Engagement Partner proceeded without exercising 

due care, conducting an audit he lacked the competence to lead.  And Prager Metis failed to 

prevent him from doing so, allowing the Engagement Partner to proceed without properly 

assessing whether the assembled engagement team had the required competence, capabilities, 

and resources.   

65. As described above, the Engagement Partner lacked even a basic understanding of 

crypto assets, and how that technology operated in connection with the FTX trading platform.  

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And while he brought on contractors intended to address his lack of relevant experience and 

knowledge regarding the crypto asset industry and crypto trading platforms, the Engagement 

Partner still had the responsibility under GAAS for the direction, supervision, and performance 

of the audit engagement to ensure it was conducted in compliance with professional standards, 

applicable legal and regulatory requirements, and the firm’s policies and procedures.  AU-C 

§ 220.17.  But because he himself did not gain a reasonable understanding of how FTX operated 

or how crypto technology worked in general, the Engagement Partner could not effectively 

supervise members of his engagement team. 

66. The Engagement Partner thus failed to exercise due care, in violation of GAAS, 

by moving forward with the audit of FTX’s financial statements, and Prager Metis failed to 

implement and monitor its policies and procedures to ensure that the Engagement Partner and 

team had the competence and capabilities to perform the engagement. 

D. In Violation of GAAS, Prager Metis Failed to Design and Execute an 
Audit that Appropriately Assessed the Risks of Material Misstatements. 

67. The decision to take on a client they did not understand and lacked the 

competence to audit then led to additional GAAS violations by Prager Metis at the design and 

execution phases of the audit.  This included both overarching failures and specific failures.  

68. The overarching failure, which ran throughout the design and execution process, 

was the failure of the Engagement Partner and the engagement team to exercise professional 

judgment and to perform the audit with professional skepticism, in violation of GAAS.  AU-C 

§§ 200.17, 200.18.  As a result, the auditors did not have the basis to form the opinion that the 

financial statements were presented fairly, in all material respects, in accordance with GAAP, as 

required by GAAS.  AU-C § 200.04. 

69. The auditing flaws in the design and execution stage can again be traced back to 

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the Engagement Partner’s fundamental lack of understanding of FTX and the crypto asset 

markets more broadly.  GAAS specifically requires that, in order to design and perform audit 

procedures that identify and assess the risks of material misstatement, an auditor has to 

understand the entity and its environment.  AU-C § 315.  Among other relevant requirements, an 

auditor is required to understand relevant industry, regulatory, and other external factors; the 

nature of the entity and its operations; and the way it is structured.  AU-C § 315.12. 

70. As discussed above, the Engagement Partner failed to understand crypto asset 

markets, crypto asset trading platforms, and FTX as an entity.  He failed to exercise professional 

judgment in even taking on the engagement.  He failed to educate himself about the industry and 

the entity in order to develop the knowledge he needed to understand how to design and execute 

the audit.  As a result, he failed to understand significant issues relating to FTX’s financial 

statements.   

71. The failure to understand FTX was also evident in the failure to obtain an 

understanding of “the control activities relevant to the audit … [which are those] necessary to 

understand in order to assess the risks of material misstatement,” as specifically required under 

GAAS.  AU-C § 315.21.  It was evident from the start of the audit that the individuals running 

both FTX and Alameda lacked significant business experience, and the engagement team knew 

or should have known that the corporate structure was loose and informal.  But the engagement 

team failed to exercise professional skepticism or professional judgment in considering FTX’s 

control environment in its risk assessment process.   

72. As discussed above, the most impactful aspect of the Engagement Partner’s 

failure to understand FTX was his failure to understand FTX’s relationship with Alameda.  

GAAS specifically recognizes that, in exercising professional judgment about significant risks, 

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an auditor should give special consideration to related party relationships and transactions. AU-C 

§§ 315.29, 550.  And, as noted above, the issue of FTX-related parties was flagged by a Prager 

Metis partner before the engagement even officially commenced, when he noted that there 

appeared to be significant related party transactions that had not been booked.  GAAS 

specifically notes that “related party transactions may be motivated solely or in large measure to 

engage in fraudulent financial reporting or conceal misappropriation of assets.”  AU-C § 550.03.   

73. GAAS explains why understanding related party relationships and transactions 

are so important to an audit:  “Because related parties are not independent of each other, 

financial reporting frameworks establish specific accounting and disclosure requirements for 

related party relationships, transactions, and balances to enable users of the financial statements 

to understand their nature and actual or potential effects on the financial statements.  Therefore, 

the auditor has a responsibility to perform audit procedures to identify, assess, and respond to the 

risks of material misstatement arising from the entity’s failure to appropriately account for or 

disclose related party relationships, transactions, or balances.”  AU-C § 550.04.  “In addition, an 

understanding of the entity’s related party relationships and transactions is relevant to the 

auditor’s evaluation of whether one or more fraud risk factors are present … because fraud may 

be more easily committed through related parties.” AU-C § 550.05.    

74. Moreover, GAAS specifically recognizes that planning and performing an audit 

with professional skepticism is particularly important in the context of related party transactions, 

given the potential for undisclosed related party relationships and transactions.  AU-C § 550.07. 

75. Despite these specific requirements, which make explicit the importance of 

applying the concept of professional skepticism in analyzing related party transactions, the 

Engagement Partner and engagement team failed to adequately assess the risk of material 

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misstatement arising from the relationship between Alameda and FTX.  The team memorialized 

the information regarding Alameda’s borrowing in a perfunctory, one-line document.  In 

addition, the team accepted without further investigation agreements that were signed by 

Bankman-Fried on behalf of both FTX and Alameda, and a one-page document that essentially 

amounted to an I.O.U. between the two companies, both owned by Bankman-Fried.   

76. Professional skepticism calls for a questioning mind, but the engagement team 

appears to have simply accepted these representations and documents at face value.  Similarly, 

the large and exponentially increasing transactions between FTX and Alameda, including in 

large round-value numbers, were accepted by the engagement team without meaningful inquiry 

or re-engaging in the risk assessment process.  Because Prager Metis failed to design and execute 

an audit that appropriately assessed the risks of material misstatements, it failed to obtain the 

sufficient appropriate audit evidence necessary to support its opinions that FTX’s financial 

statements were presented fairly, in all material respects, in compliance with GAAP.  

Accordingly, the firm’s representation in its audit report that it complied with GAAS was not 

true. 

E. Prager Metis Failed to Properly Document the Purportedly Completed 
Audits, in Violation of GAAS.    

77. Prager Metis’s failure to meet its professional responsibilities continued through 

November 2022.  GAAS requires audit documentation to be finalized within 60 days of the date 

of the release of the report.  AU-C § 230.16.  And the firm is required under the SQCS to 

establish policies and procedures for engagement teams to complete the assembly of final 

engagement files on a timely basis after the engagement reports have been released.  QC § 10.49.   

78. But once again, while Prager Metis had quality control policies and procedures in 

place that required its engagement teams to comply with GAAS, the FTX engagement team did 

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26 

not do so, and the firm failed to implement its own policies to ensure compliance.  As described 

above, the electronic process of closing the audit workpapers for both audits were finalized only 

after FTX collapsed, in November 2022.  

79. In addition, the overall nature of the audit documentation itself—for example, the 

open comments and the cut-and-paste response—exhibited a lack of due care on the part of the 

Engagement Partner and the firm, in violation of GAAS.  AU-C § 200.16.  

80. Thus, from the inception to the end, Prager Metis’s audits of FTX failed to 

comply with GAAS, and its statements to the contrary in the audit reports were not true. 

FIRST CLAIM FOR RELIEF 

NEGLIGENCE-BASED FRAUD IN THE OFFER OR SALE OF SECURITIES  

(Violations of Sections 17(a)(2) and (3) of the Securities Act) 

81. The Commission re-alleges and incorporates by reference the allegations 

contained in paragraphs 1 through 80.    

82. By reason of the conduct described above, on or about July 30, 2021, Defendant, 

in connection with the offer or sale of securities, by the use of the means or instrumentalities of 

interstate commerce or of the mails, directly or indirectly, acting negligently, (i) obtained money 

or property by means of an untrue statement of a material fact; and (ii) engaged in acts, practices, 

or courses of business which operated or would operate as a fraud or deceit upon any persons, 

including purchasers or sellers of the securities.   

83. By reason of the conduct described above, Defendant violated Securities Act 

Sections 17(a)(2) and (a)(3) [15 U.S.C. §§ 77q(a)(2) and (a)(3)]. 

  

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SECOND CLAIM FOR RELIEF 

NEGLIGENCE-BASED FRAUD IN THE OFFER OR SALE OF SECURITIES  

(Violations of Sections 17(a)(2) and (3) of the Securities Act) 

84. The Commission re-alleges and incorporates by reference the allegations 

contained in paragraphs 1 through 80.   

85. By reason of the conduct described above, Defendant, on or about April 2, 2022, 

in connection with the offer or sale of securities, by the use of the means or instrumentalities of 

interstate commerce or of the mails, directly or indirectly, acting negligently, (i) obtained money 

or property by means of an untrue statement of a material fact; and (ii) engaged in acts, practices, 

or courses of business which operated or would operate as a fraud or deceit upon any persons, 

including purchasers or sellers of the securities.   

86. By reason of the conduct described above, Defendant violated Securities Act 

Sections 17(a)(2) and (a)(3) [15 U.S.C. §§ 77q(a)(2) and (a)(3)]. 

PRAYER FOR RELIEF 

WHEREFORE, the Commission respectfully requests that this Court enter a Final 

Judgment: 

A. Permanently restraining and enjoining Defendant, its officers, agents, servants, 

employees and attorneys, and those persons in active concert or participation with it who receive 

actual notice of the injunction by personal service or otherwise, and each of them, from violating 

Sections 17(a)(2) and (a)(3) of the Securities Act [15 U.S.C. §§ 77q(a)(2) and (a)(3)]; 

B. Ordering Defendant to pay civil monetary penalties pursuant to Section 20(d) of 

the Securities Act [15 U.S.C. § 77t(d)]; and 

C. Granting such other and further relief as this Court may deem just and proper. 

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JURY DEMAND 

The Commission demands trial by jury. 

DATED: September 17, 2024 
 

       Respectfully submitted, 

 
       /s/ Amy Harman Burkart   

Amy Harman Burkart 
David J. D’Addio 
SECURITIES AND EXCHANGE  
  COMMISSION     
Attorneys for the Plaintiff 
 

 
Of Counsel 
Jorge G. Tenreiro 
Michael Brennan  
Amy Flaherty Hartman 
Devlin Su  

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