FTX Users Expand Lawsuit Against Law Firm Over Alleged Fraud Facilitation

New Evidence Emerges from Criminal Trial

FTX customers are strengthening their legal case against Fenwick & West, a law firm that previously represented the collapsed cryptocurrency exchange. The customers filed an amended lawsuit claiming new evidence demonstrates the law firm's central role in enabling the massive fraud that led to FTX's downfall.

The updated complaint alleges that information from Sam Bankman-Fried's criminal trial and bankruptcy proceedings reveals Fenwick provided substantial assistance in creating structures that facilitated the fraud. According to the filing, the FTX fraud was only possible because Fenwick helped establish and approve conflicted corporate structures.

Law Firm Allegedly Created Conflicted Corporate Structures

The lawsuit accuses Fenwick & West of creating and managing clearly conflicted companies, including FTX's sister trading firm Alameda Research and its subsidiary North Dimension. These entities allegedly lacked proper safeguards to prevent the theft of billions of dollars in customer funds.

Prosecutors previously described the FTX fraud as one of the largest financial frauds in United States history. The current lawsuit is part of a massive multi-district class-action case filed by FTX users after the exchange collapsed in late 2022.

Testimony Reveals Law Firm's Knowledge of Misconduct

The amended complaint highlights testimony from Bankman-Fried's criminal trial, where key witnesses provided damaging information about Fenwick's involvement. Nishad Singh, FTX's former engineering director who pleaded guilty and testified against Bankman-Fried, reportedly informed Fenwick about customer fund misuse and improper loans.

According to the testimony, Singh told the law firm about false representations being made, and Fenwick allegedly advised on how to facilitate and hide these illegal activities. This testimony emerged during the trial that resulted in Bankman-Fried's conviction on seven fraud and money laundering charges.

Bankruptcy Examiner Finds Deep Law Firm Involvement

An independent examiner appointed by the bankruptcy court reviewed over 200,000 internal documents and concluded that Fenwick was deeply intertwined in nearly every aspect of FTX Group's wrongdoing. The examiner reportedly found that the law firm maintained exceptionally close relationships with FTX's executive team.

The bankruptcy investigation revealed that Fenwick facilitated conflicted intercompany transactions that misused customer assets. The law firm allegedly created shell companies to obscure asset movements and implemented auto-deleting messages between FTX executives using the Signal messaging app.

Securities Law Violations Alleged

The updated complaint adds two new state law claims against Fenwick & West, accusing the firm of violating securities laws in Florida and California. These violations allegedly relate to FTX's native cryptocurrency token, FTT, and other financial products offered by the exchange.

FTX customers claim Fenwick played an active role in designing, promoting, and facilitating the sale of FTT tokens, yield-bearing accounts, and other FTX-controlled instruments. The lawsuit alleges these products were unregistered securities that violated state regulations.

Law Firm's Defense Strategy

Fenwick & West has denied the allegations and filed a motion to dismiss the previous complaint. The law firm argued that it cannot be held accountable for aiding a client's wrongdoing as long as its conduct falls within the scope of client representation.

The law firm has not yet responded to requests for comment regarding the amended complaint. This legal strategy reflects common defenses used by professional service providers when accused of facilitating client misconduct.

Broader Legal Implications

The FTX collapse has triggered numerous lawsuits against various parties alleged to have enabled or benefited from the fraud. FTX customers initially sued another law firm, Sullivan & Cromwell, but later dropped that complaint due to insufficient evidence.

The case against Fenwick & West represents one of the most significant legal challenges facing professional service providers in the cryptocurrency industry. The outcome could establish important precedents for the liability of lawyers and other professionals who work with crypto companies.

Industry Impact and Future Considerations

The allegations against Fenwick & West highlight the complex legal and ethical challenges facing law firms that represent cryptocurrency companies. As the industry continues to evolve, legal professionals must navigate unclear regulations while ensuring they do not facilitate illegal activities.

The FTX case serves as a cautionary tale for both cryptocurrency companies and their professional advisors about the importance of proper compliance and risk management. The ongoing litigation will likely influence how law firms approach cryptocurrency clients and structure their professional relationships in this emerging industry.

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