The Hidden Risks of Legal and Advisory Firms in Crypto Collapses: A Investor's Guide to Liability and Due Diligence

The collapse of major cryptocurrency platforms like FTX and Terra-UST/Luna has exposed a critical but often overlooked risk for investors: the liability of legal and advisory firms in enabling or exacerbating systemic failures. While much attention has focused on the founders and operators of these platforms, recent legal actions and regulatory enforcement highlight how gatekeepers—lawyers, auditors, and consultants—can play pivotal roles in crypto collapses. For investors in crypto infrastructure, understanding these dynamics is essential to assessing risk and demanding accountability.

The Evolving Legal Landscape

Legal and advisory firms are increasingly being held liable for their roles in crypto failures. In the FTX case, Fenwick & West, a prominent Silicon Valley law firm, faces a class-action lawsuit alleging it designed opaque corporate structures that enabled Sam Bankman-Fried to siphon customer funds [1]. The plaintiffs argue that Fenwick’s legal work facilitated fraud by creating shell companies and backdated agreements to obscure FTX’s financial activities [4]. Similarly, the SEC has pursued legal action against Tai Mo Shan Limited, a subsidiary of Jump Crypto, for misleading investors about the stability of the Terra USD (UST) stablecoin, resulting in a $123 million settlement [2]. These cases signal a regulatory shift toward holding professional gatekeepers accountable for their role in crypto-related misconduct.

The U.S. Securities and Exchange Commission (SEC) has also broadened its enforcement scope. While it dismissed several high-profile cases against Ripple, Coinbase, and Binance in 2025, it has continued to target firms for fraud and market manipulation. For example, the SEC secured a judgment against CLS Global for manipulating the NexFundAI token and pursued a $100 million securities fraud case against Unicoin [3]. These actions underscore a growing emphasis on transparency and compliance in the crypto sector.

Case Studies: FTX and Terra-UST/Luna

The FTX collapse offers a stark example of how legal and advisory firms can become entangled in crypto failures. The independent examiner in FTX’s bankruptcy described Fenwick & West as “deeply intertwined” in the exchange’s fraudulent activities, citing its close relationships with FTX insiders and its role in drafting legal frameworks that obscured mismanagement [1]. Fenwick has denied these allegations, arguing that it provided routine legal services and had no knowledge of the fraud [4]. However, the case raises broader questions about the boundaries of legal representation in high-risk industries.

The Terra-UST/Luna crisis further illustrates this trend. Terraform Labs’ $4.5 billion settlement with the SEC and the guilty plea of co-founder Do Kwon highlight the systemic risks of opaque stablecoin mechanisms [2]. Meanwhile, Jump Crypto’s $123 million penalty for misleading investors underscores the importance of due diligence in assessing the credibility of crypto projects and their advisors [2].

Investor Compensation and Legal Challenges

Investor lawsuits are increasingly targeting legal and advisory firms for compensation. A $13 million class-action settlement for BlockFi investors, who lost funds due to the lender’s collapse, demonstrates the challenges of recovering losses in crypto bankruptcies [1]. BlockFi’s failure was exacerbated by its $680 million exposure to FTX and Alameda Research, revealing how interconnected risks can amplify investor losses [1].

Multidistrict litigation (MDL) cases, such as those against Fenwick & West, are also reshaping liability norms. These lawsuits allege that law firms actively enabled fraud by designing structures to evade regulatory scrutiny [4]. While Fenwick has contested these claims, the litigation highlights the potential for legal professionals to face liability in digital asset-related matters.

Risk Assessment for Investors

For investors in crypto infrastructure, the key takeaway is clear: due diligence must extend beyond the project itself to its legal and advisory teams. Questions to consider include:
- Transparency: Are the legal and advisory firms associated with the project reputable and transparent in their operations?
- Regulatory Compliance: Have these firms demonstrated adherence to securities laws and anti-fraud measures?
- Past Conduct: Have they been involved in previous crypto collapses or enforcement actions?

The ongoing litigation in cases like Coinbase v. SEC and Samuels v. Lido DAO also signals that regulatory clarity is still evolving. A ruling in favor of Coinbase could force the SEC to create a bespoke framework for digital assets, potentially reducing ambiguity but also introducing new compliance burdens [4].

Conclusion

The liability of legal and advisory firms in crypto collapses is no longer a theoretical concern—it is a reality shaping investor risk profiles. As the industry matures, investors must demand accountability from all stakeholders, not just the operators of crypto platforms. By scrutinizing the roles of gatekeepers and advocating for clearer regulatory frameworks, investors can better navigate the volatile and complex world of crypto infrastructure.

**Source:[1] FTX Investors Sue Law Firm, Alleging Role in Exchange's Fraud, [https://finance.yahoo.com/news/ftx-investors-sue-law-firm-105022560.html][2] 2.5Y After Terra and Luna Collapse, SEC Reaches $123 Million Settlement With Crypto Firm, [https://www.financemagnates.com/cryptocurrency/regulation/25y-after-terra-and-luna-collapse-sec-reaches-123-million-settlement-with-crypto-firm/][3] Digital Currency & Blockchain Quarterly Litigation Update, [https://www.goodwinlaw.com/en/insights/newsletters/2025/07/newsletters-practices-dcb-digital-currency-blockchain-q2-2025][4] Fenwick Denies Lawsuit Claiming It Helped FTX Fraud, [https://cointelegraph.com/news/fenwick-denies-lawsuit-claming-it-was-key-ftx-fraud]