Sleep with dogs get fleas.

If the small distributor you work with is investigated because of its dealings with this company it's entirely possible you'll have to go through that process as well, not to mention have a distributor that is busy fending off lawsuits instead of distributing content you've worked hard to create.

You are right to feel trepidation in this situation and you are right to re examine your business relationships. You're Mum was right too. Follow your gut.