FTX Users Sue Law Firm Over Role in Crypto Exchange Collapse

FTX users have expanded their class-action lawsuit against law firm Fenwick & West, alleging that the firm was instrumental in facilitating the collapse of the crypto exchange. The amended filing, submitted in response to new evidence emerging from the criminal trial of former FTX CEO Sam Bankman-Fried and the ongoing bankruptcy proceedings, argues that Fenwick played a central role in creating and approving the legal structures that enabled FTX’s fraud [1].

The lawsuit asserts that Fenwick not only helped design FTX’s sister entities—Alameda Research and North Dimension—but also failed to implement necessary safeguards to prevent the misuse of customer funds. These companies, the plaintiffs claim, were structured in a way that allowed for improper transactions and the misappropriation of assets on a massive scale [1].

According to the filing, internal documents reviewed by an independent examiner in the FTX bankruptcy revealed that Fenwick was “deeply intertwined” in nearly every aspect of the fraud. The firm allegedly facilitated conflicted intercompany transactions and even contributed to the creation of shell companies to obscure the movement of assets. The plaintiffs further claim that Fenwick was behind the implementation of auto-deleting messages on encrypted platforms like Signal, which were used to evade scrutiny from regulators and investors [1].

Testimony from cooperating witnesses, including FTX insiders who pleaded guilty, is also cited in the filing. Nishad Singh, FTX’s former engineering director, reportedly informed Fenwick about the misuse of customer funds and improper loans, yet the firm allegedly advised on how to hide these actions. The plaintiffs argue that Fenwick was aware of the fraudulent nature of these activities and chose to enable them [1].

In response to the initial complaint filed in August 2023, Fenwick moved to dismiss the case, claiming that it cannot be held liable for a client’s misconduct if its actions were within the scope of legal representation. The law firm did not immediately respond to a follow-up request for comment [1].

The amended lawsuit introduces two new claims under state securities laws, alleging that Fenwick violated Florida and California regulations by assisting in the unregistered sale of FTX Token (FTT) and other FTX-related instruments. The plaintiffs argue that the firm played an active role in designing and promoting these offerings, which they claim constituted unregistered securities [1].

This latest legal action is part of a broader class-action effort that has also targeted celebrities and other firms alleged to have aided FTX’s operations. The plaintiffs previously pursued a similar case against another FTX law firm, Sullivan & Cromwell, but dropped it due to insufficient evidence [1].

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