The biggest City fraud cases since the crash of 2008 are close to collapsing because of the government's cuts to legal aid. The refusal of barristers to work at the government's new low rates has already led to Judge Anthony Leonard throwing out charges against five men accused of conning investors out of their savings by selling them land at grotesquely inflated prices.

If the court of appeal upholds the verdict on Tuesday, a string of prosecutions designed to clean up London's financial markets may be dropped. Last week, solicitors for alleged insider dealers caught in the Financial Conduct's Authority's Operation Tabernula – the most ambitious and expensive investigation into the City – said they would seek to have the charges against their clients thrown out.

Colin Nott, who represents Richard Baldwin, one of six defendants who are due to stand trial in September, said he could not find a QC to represent his client. Unless the fight between the coalition government and the legal profession stopped, it would be impossible for Baldwin to have a fair trial. Detectives told the Observer that they feared an investigation into the manipulation of Libor rates, welcomed by chancellor George Osborne, could also come to nothing.

Chris Grayling, the justice secretary, told the 2012 Conservative party conference: "I've made no bones about my intention to be a tough justice secretary. Too often those who offend think that nothing will happen to them." Lawyers now say he can be tough on crime or tough on the legal aid budget, but he cannot be tough on both.

Francis FitzGibbon, one of London's leading criminal QCs, said that Grayling had been so concerned with attacking lawyers and the Human Rights Act that he had not realised he was in danger of making the prosecution of cases of complicated fraud impossible in Britain.

Although they do not like the term, lawyers have gone on strike. Last September, Grayling's department cut the rates for barristers handling complex cases of 16 weeks or longer by 30%. Barristers representing men accused of duping investors into buying supposedly valuable "development land" refused to carry on. The defendants' solicitors contacted 69 sets of barristers' chambers in England, Scotland and Northern Ireland. None would take the case. Although the government has state-funded "public defenders", who could take the case in theory, just three are qualified to handle serious fraud cases. Two were booked and one was ill.

On 1 May, Judge Leonard refused to delay the trial indefinitely until lawyers could be found. The defendants could not "receive a fair trial without advocates to represent them," he said. Unless the court of appeal reverses his ruling they will walk free.

Although there is no coordinated boycott, the Bar Council, which regulates barristers, said that a 30% cut coming on top of previous cuts in fees was so severe that QCs were no longer obliged under the "cab-rank rule" to take complex fraud cases. Freed to say "no", scores of barristers have said just that.

One senior QC told the Observer that successive governments "thought they could portray us as 'fat cats' even though the fees for legal aid work have been growing smaller and smaller in real terms since the 1990s.

"We've always backed down in the past, and I don't think ministers know what to do now we are fighting."

The Criminal Bar Association said that for preparing and arguing a complex fraud over many months, perhaps a year, a QC would now earn £68,000 and a junior £40,000. "Both figures gross," said Nigel Lithman, the association's chairman, "before rent for chambers, staffing costs, tax, national insurance and pension have been deducted. Ministers have to decide whether they want to preside over the downfall of the justice system."

Nearly all defendants in serious fraud cases need legal aid, because the state freezes their assets, leaving them without the means to meet legal bills.

The government created the Financial Conduct Authority in 2012 after widespread criticism that not one banker was prosecuted after the crash. Its officers are exasperated that a dispute over a relatively small cut of £13m is threatening fraud investigations worth hundreds of millions. They have come to see Operation Tabernula as a defining test of whether London could revive its reputation after the crash and offer a credible criminal deterrent against white-collar crime. The investigation has included dawn raids involving 143 officers and thousands of hours of case work.

Meanwhile, the FCA alleged that the organisers of the land scam took £5m from investors. The authority had already secured a winding-up order against companies associated with the defendants, but a source said: "Without a trial there will be no possibility of justice."