FTX Investors Drag Law Firm to Court—Allege Complicity in Exchange’s $10B Fraud Debacle
Another day, another crypto lawsuit—but this one's got teeth. FTX investors just lobbed a legal grenade at the law firm they claim greased the wheels for Sam Bankman-Fried's alleged Ponzi scheme.
Subheading: 'Legal Eagles or Enablers?'
The complaint alleges the firm turned a blind eye to glaring red flags while collecting fat retainers. Sources say plaintiffs are demanding clawbacks of every cent paid in legal fees—plus punitive damages that could bankrupt the practice.
Subheading: 'Discovery Phase = Fireworks'
Expect a treasure trove of leaked emails and memos when discovery kicks off. The real question: How many other 'reputable' firms were asleep at the wheel during crypto's wild west years?
Closing zinger: Who needs auditors when you've got lawyers willing to rubber-stamp balance sheets between martini lunches?
Shell game?
The firm is accused of creating shell companies such as North Dimension to disguise customer deposits and withdrawals, thereby helping FTX evade regulatory oversight.
However, legal experts caution that proving law firm culpability requires more than extensive client engagement.
Even Alex Chandra, partner at IGNOS Law Alliance, told Decrypt that being "deeply intertwined" could simply reflect "the breadth of engagement with a complex client, where broad involvement is often necessary to understand and address their legal needs."
He added that "there must be proof of both actual knowledge of illegal acts and substantial assistance in carrying them out" beyond routine legal work.
The FTX bankruptcy's Independent Examiner, who reviewed over 200,000 documents, concluded that "Fenwick specifically was deeply intertwined in nearly every aspect of FTX Group's wrongdoing."
The examiner found the firm had "exceptionally close relationships" with insiders and facilitated transactions that misused customer assets.
Nishad Singh, FTX's former engineering director who pleaded guilty and cooperated with prosecutors, testified earlier that he "informed Fenwick of the misuse of customer funds, improper loans, and false representations, and… Fenwick advised on how to facilitate and hide these very acts."
Caroline Ellison, former Alameda Research CEO, also admitted that "FTX used customer money to help Alameda meet its liabilities," confirming that she, Bankman-Fried, and other executives knew customer funds were being diverted to cover trading losses.
Investors claim Fenwick's Silicon Valley prestige was crucial for legitimizing FTX with investors and venture capitalists, helping the exchange raise over $1.3 billion while allegedly knowing about insolvency risks.
The lawsuit alleges that Partner Tyler Newby authored FTX’s encrypted communications policy, which enabled Signal disappearing messages, while Partner Andrew Albertson allegedly helped connect the exchange to key venture capitalists.
FTX filed for bankruptcy on November 11, 2022, after revelations about Alameda's financial condition.
Bankman-Fried was later convicted on seven fraud counts and sentenced to 25 years in prison, and has since been transferred to a medium-security facility in California, where he continues to maintain his innocence while pursuing an appeal of his conviction.
