FTX Customers Amend Lawsuit Alleging Law Firm Enabled Fraud

Customers of the now-bankrupt cryptocurrency exchange FTX are seeking to amend their class-action lawsuit against Fenwick & West, a law firm that previously represented the company, alleging the firm played a central role in enabling the fraud that led to FTX’s collapse. In a recent filing, plaintiffs claim newly emerged evidence from the criminal trial of former FTX CEO Sam Bankman-Fried and the ongoing bankruptcy proceedings reveals that Fenwick provided “substantial assistance” in creating and approving structures that facilitated the fraudulent activities [1].

The lawsuit, part of a broader multi-district class-action, accuses Fenwick of helping FTX design and manage entities such as Alameda Research and North Dimension, which were allegedly used to misappropriate customer funds without adequate safeguards. FTX’s fraud, described by prosecutors as one of the largest in U.S. history, involved the theft of billions of dollars from investors [1].

According to the filing, Nishad Singh, FTX’s former engineering director, testified during Bankman-Fried’s criminal trial that he had informed Fenwick about the misuse of customer funds, improper loans, and false representations. The plaintiffs argue that the law firm not only was aware of these activities but also advised on how to facilitate and conceal them [1].

An independent examiner appointed to oversee FTX’s bankruptcy proceedings reportedly reviewed more than 200,000 internal documents, many of which related directly to Fenwick. The examiner concluded that the firm was “deeply intertwined” in nearly every aspect of FTX Group’s wrongdoing. It found that Fenwick maintained “exceptionally close relationships” with FTX executives and helped facilitate intercompany transactions that misused customer assets. The firm is also accused of creating shell companies to obscure asset movements and implementing auto-deleting messages via the Signal app, which may have hindered regulatory and investigative efforts [1].

The amended complaint adds two new claims under Florida and California securities laws, accusing Fenwick of playing an active role in the design, promotion, and sale of FTX Token (FTT), yield-bearing accounts, and other FTX-controlled instruments that the plaintiffs claim were unregistered securities. Fenwick previously moved to dismiss the original complaint, arguing that it cannot be held liable for assisting a client in wrongdoing if its conduct was within the scope of legal representation [1].

Fenwick & West has not yet responded to the latest filing but had earlier denied the allegations and sought to have the original suit dismissed. FTX users also previously pursued a similar claim against Sullivan & Cromwell, another law firm retained by FTX, but dropped the case due to insufficient evidence [1].

Source: [1] Cointelegraph (https://cointelegraph.com/news/ftx-users-bolster-lawsuit-claiming-law-firm-was-key-to-ftx-fraud)