Silvergate Bank is now forced to face a class action lawsuit filed by FTX users who allege that the bank, which has since declared bankruptcy, aided and abetted fraud in the stock market and its affiliated trading company Alameda Research. On March 20, Judge Ruth Bermudez Montenegro of the San Diego federal court denied Silvergate’s request to dismiss the lawsuit filed in June, determining that the class group sufficiently alleged that Silvergate knew of FTX’s fraud but benefited from it and unjustly enriched itself at the expense of FTX users.
Decision Issued in Silvergate Case
The court decided that the Silvergate Exchange Network, created to facilitate the transfer of funds to crypto exchanges, was largely in the interest of FTX customers and that Silvergate had an obligation to take care of FTX customers because operating a crypto exchange like FTX without SEN would have been nearly impossible. The judge wrote that Silvergate banked both FTX and Alameda and processed transfers that sent FTX customer money to Alameda, accepting deposits. Initially, FTX did not have a bank account, so customers were directed to transfer money to Alameda’s account. The following statements were shared:
“Silvergate had a strong incentive to continue accepting FTX and Alameda customer deposits and processing transfers because Silvergate’s business was focused on the adoption of the FTX exchange platform and application. It could have been foreseen that allowing FTX customer funds to be deposited into accounts outside of FTX would lead to fraud and harm the owners of these funds.”
Silvergate earned income from translation fees and interest on accounts related to FTX. The decision alleges that Silvergate’s annual revenue before the exchange was $7.6 million and rose to $75.5 million after the exchange was launched.
What Are the Details of the Decision?
The decision noted that Silvergate’s motion to dismiss claimed that the bank had no duty of care to FTX customers because the transactions alleged in the lawsuit were not a significant factor in FTX customers’ inability to withdraw funds; instead, it was the fault of FTX and its co-founder Sam Bankman-Fried. Silvergate also argued that if it had rejected FTX’s transfers, the exchange would have found another bank, which the judge characterized as highly speculative since Silvergate was one of the few banks willing to serve the crypto industry.
The judge’s green light for the lawsuits came more than a year after they were first filed in February 2023. Three separate class actions against Silvergate were consolidated in April. Silvergate declared bankruptcy approximately a month later in March 2023, just months after FTX’s bankruptcy in November 2022.
Bankman-Fried was found guilty of various charges of fraud and money laundering last November. His sentencing date was set for March 28.
