Customers of the bankrupt crypto exchange FTX are looking to update their lawsuit against Fenwick & West, one of the law firms once contracted by the company, claiming new information shows it was central to FTX’s collapse.
The criminal trial of former FTX CEO Sam Bankman-Fried and investigations in the exchange’s bankruptcy proceedings “produced specific evidence supporting that Fenwick played a key and crucial role in the most important aspects of why and how the FTX fraud was accomplished,” FTX customers wrote in a court filing to amend their suit on Monday.
“Simply put, the FTX Fraud was only possible because Fenwick provided ‘substantial assistance’ by creating and approving the structures that allowed numerous frauds,” the group said.
They accused the law firm of agreeing to create, manage and represent “clearly conflicted companies” such as FTX’s sister trading firm Alameda Research and its subsidiary North Dimension, “which purposefully had no safeguards to prevent the billions of dollars that were admittedly stolen.”
FTX’s fraud was once described by prosecutors as one of the biggest in US history.
The filing is part of a massive multi-district class-action lawsuit filed by FTX users after it collapsed in late 2022 that has brought claims against the exchange, celebrities accused of promoting FTX and multiple companies alleged to have worked with the firm, among others.
A highlighted excerpt of part of the class group’s accusations against Fenwick. Source: CourtListener
Fenwick has denied and moved to dismiss allegations in a previous complaint filed in August 2023. Fenwick & West did not immediately return Cointelegraph’s request for comment.
Bankman-Fried’s trial unearths new information, says complaint
The proposed amended complaint claimed that Bankman-Fried’s criminal trial last year had uncovered new information about how Fenwick had assisted FTX.
FTX co-founder Zixiao “Gary” Wang, former Alameda CEO Caroline Ellison and FTX’s ex-engineering director Nishad Singh pleaded guilty and testified against Bankman-Fried, with a jury finding him guilty on seven charges relating to fraud and money laundering.
“At SBF’s criminal trial, FTX Insider and co-founder Nishad Singh testified that he informed Fenwick of the misuse of customer funds, improper loans, and false representations, and that Fenwick advised on how to facilitate and hide these very acts,” the filing said.
The group claimed in a separate filing that it “has learned many more details on Fenwick’s relationship to FTX, based upon the interviews cooperation of the settled FTX Insiders.”
Bankruptcy court finds Fenwick “deeply intertwined” with FTX, customers claim
The filing claimed that an independent examiner appointed by the court handling FTX’s bankruptcy proceedings “reviewed over 200,000 internal documents (many related directly to Fenwick) and concluded that Fenwick specifically was deeply intertwined in nearly every aspect of FTX Group’s wrongdoing.”
According to the group, the examiner found Fenwick had “exceptionally close relationships” with FTX’s executive team and “facilitated conflicted intercompany transactions that misused customer assets.”
They also said the examiner accused Fenwick of creating shell companies “to obscure asset movements” and was behind implementing auto-deleting messages sent between FTX executives via the encrypted messaging app Signal.
The group accused Fenwick of also implementing “other concealment practices that regulators and prosecutors later cited as obstruction” and claimed the law firm “knew that these actions would mislead investors and regulators.”
Fenwick hit with two new securities claims
The proposed complaint adds two new state law claims, accusing Fenwick of violating securities laws in Florida and California over the exchange’s cryptocurrency, FTX Token (FTT).
The group accused the law firm of playing “an active role in designing, promoting, and facilitating the sale” of FTT, yield-bearing accounts offered by FTX and “interests in other FTX-controlled instruments,” which they claimed were unregistered securities.
Fenwick argued in its motion to dismiss the previous complaint filed in September 2023 that it can’t be held accountable for aiding a client’s wrong as long as its “conduct falls within the scope of the representation of the client.”
The group had also sued Sullivan & Cromwell, another law firm that FTX had contracted, accusing it of helping the exchange, but they later dropped the complaint due to a lack of evidence for their claims.
