FTX Customers Accuse Fenwick & West of Role in Exchange's Fraud in Revised Lawsuit

Customers of the failed cryptocurrency exchange FTX have sought to amend their lawsuit against Fenwick & West, citing new evidence that implicates the law firm in the exchange’s fraudulent activities. They argue that Fenwick's legal advice facilitated the misappropriation of customer funds and was integral to FTX's eventual collapse.

Key Takeaways

FTX customers have proposed amending their lawsuit against Fenwick & West, claiming new evidence links the firm to the exchange's fraud.
They allege Fenwick played a crucial role in designing corporate structures that diverted customer funds.
Testimonies from former FTX executives suggest Fenwick was aware of misconduct and advised ways to conceal it.
The filing includes findings from an independent examiner that highlights Fenwick's close ties to FTX leadership.
New claims under Florida and California securities laws have been introduced against Fenwick regarding FTX Token sales.

FTX customers claim Fenwick & West played key role in exchange’s fraud in amended lawsuit

FTX Customers’ Claims Against Fenwick & West

Displeased customers of the now-inoperative cryptocurrency exchange FTX have moved to amend their lawsuit against the firm Fenwick & West, which served as the exchange's legal advisor. They allege that this law firm played a significant role in the factors that led to FTX's downfall.

On August 11, customers filed the amended legal documents, stating that new evidence derived from Sam Bankman-Fried's criminal trial and FTX's bankruptcy proceedings indicates that Fenwick was deeply involved in the key elements of the FTX fraud.

The customers assert that FTX's failure went beyond merely internal misconduct; it stemmed from the legal frameworks designed and sanctioned by Fenwick. The filing claims that Fenwick provided "substantial assistance" to FTX, formulating and endorsing corporate structures that permitted the diversion of billions in customer funds.

The plaintiffs accuse Fenwick of representing "conflicting companies" linked to FTX, such as the trading firm Alameda Research and its subsidiary North Dimension, which they argue lacked proper safeguards against asset misuse. This lack of oversight is considered a pivotal factor in the fallout from FTX's collapse.

Former FTX executives Nishad Singh, Gary Wang, and Caroline Ellison have reportedly testified that Fenwick was aware of improper loans, false statements, and the misuse of customer assets, even offering advice on how to obscure these actions. Singh allegedly indicated to the court that he had communicated these violations to Fenwick, which in turn “advised on how to facilitate and hide these very acts,” as highlighted in the revised filing.

Also included in the amended documents are findings from an independent examiner involved in the FTX bankruptcy process. After reviewing over 200,000 documents, many of them associated with Fenwick, the examiner concluded that the law firm maintained "exceptionally close relationships" with FTX leadership and was "deeply intertwined" in various wrongdoings. It accused Fenwick of establishing shell entities to hide asset transfers and creating auto-deleting Signal chats used by FTX executives.

Moreover, plaintiffs claim that the law firm engaged in numerous other concealment practices that regulators and prosecutors later deemed as obstruction, asserting that Fenwick knew these actions would mislead both investors and regulators.

The revised filing also introduces two new claims under securities laws of Florida and California concerning Fenwick's involvement in FTX Token sales. According to the filing, "Fenwick, through its attorneys and under its direction, played an active role in designing, promoting, and facilitating the sale of unregistered securities in the form of YBAs, FTT tokens, and interests in other FTX-controlled instruments to Florida residents."

Fenwick's connections to FTX have been highlighted several times during Bankman-Fried’s trial at the end of 2023. The former CEO testified that the firm, along with FTX’s in-house legal team, managed crucial legal tasks, like payment agent arrangements for Alameda’s North Dimension bank accounts, which were used to handle FTX customer deposits. Bankman-Fried indicated that Fenwick's attorneys were aware that FTX insiders engaged in encrypted chats with auto-delete features, noting that he heavily relied on their legal opinions.

In a motion to dismiss filed in September 2023, Fenwick contested the accusations, arguing it could not be held accountable for a client’s actions when its services were executed within the standard scope of legal representation and denied all claims made in the original filing.