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Silvergate Bank Faces Class-Action Lawsuit Over Alleged Role in FTX Fraud
A federal judge has allowed a class-action lawsuit to move forward against the defunct Silvergate Bank. The lawsuit claims that the bank played a major role in assisting the collapsed cryptocurrency exchange FTX, and its associated trading firm, Alameda Research.
Judge Ruth Bermudez Montenegro of the San Diego federal court made the ruling on March 20, rejecting the bank’s attempt to dismiss the case. The judge stated that the claims made by the plaintiffs have enough merit to continue. She also alleged that the financial institution was aware of FTX’s illegal activities but chose to ignore them and benefit from them.
The court document revealed that the defendants were aware of the fraud happening through FTX and Alameda accounts at Silvergate but also actively helped perpetrate it. The document released stated:
“Defendants not only knew of the fraud perpetrated through the FTX and Alameda accounts at Silvergate, but also they substantially helped FTX, Alameda, and SBF perpetrate that fraud.”
Judge Ruth also questioned the bank’s creation of the Silvergate Exchange Network (SEN), a payment system designed to facilitate fund transfers within the digital currency space. The court stated that the network was established primarily for the benefit of FTX users, and therefore, the financial institution had an obligation to protect the customers of the exchange. Without the services provided by SEN, it would be challenging for cryptocurrency exchanges like FTX to operate. The judge noted that, despite being aware of the risks associated with working with crypto firms, Silvergate quickly transitioned into a “crypto-focused bank.”
In its defense, Silvergate argued that it did not have a duty of care towards FTX customers and that its actions were not a significant factor in the customers’ inability to withdraw funds. The bank claimed that the harm suffered by the customers was not caused by their conduct. In the released document, the bank’s defense argued:
“Defendants argue Plaintiffs’ negligence claim fails as a matter of law because Defendants did not owe Plaintiffs a duty of care and because Defendants’ conduct did not cause Plaintiffs’ alleged harm.”
Silvergate’s Lucrative Relationship with FTX
The bank was further accused of providing banking services to both FTX and Alameda Research, processing transfers, and accepting deposits that directed the defunct exchange customers’ funds into Alameda’s accounts. This was done because FTX initially did not have its own bank account, raising concerns about the mixing of customer funds with those of another entity.
The defendant countered the statement, stating that if they had refused FTX’s transfers, the exchange would have found another bank to facilitate its operations. However, the judge dismissed this argument, maintaining that the bank’s positions were speculative and emphasizing that Silvergate was one of the few banks willing to serve the cryptocurrency industry at that time.
The financial impact of the bank’s involvement with FTX is also significant. According to the court statement, its annual net income was only $7.6 million before partnering with FTX. However, after the collaboration, the annual income surged to $75 million. This substantial increase in revenue was derived from transaction fees and interest generated by FTX-related accounts, indicating that Silvergate greatly benefited from its relationship with the collapsed exchange.next
Silvergate Bank Faces Class-Action Lawsuit Over Alleged Role in FTX Fraud