Judge greenlights class suit alleging Silvergate Bank aided FTX fraud

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Silvergate Bank must face a class-action lawsuit from FTX users who claim the now-defunct bank aided fraud at the exchange and its connected trading firm, Alameda Research.

In a March 20 order, San Diego federal court Judge Ruth Bermudez Montenegro denied Silvergate’s June dismissal motion, finding the class group adequately alleged Silvergate knew of FTX’s fraud but benefited from it and unjustly enriched itself at the expense of FTX users — allegations the bank denies.

The court found Silvergate owed a duty of care to FTX customers as its Silvergate Exchange Network — created to help move funds to crypto exchanges — was largely for the benefit of FTX customers and “that a crypto exchange like FTX was virtually impossible before the SEN.”

Silvergate banked both FTX and Alameda and “processed transfers and accepted deposits that sent FTX customer money to Alameda,” the judge wrote. “FTX did not initially have a bank account, so customers were directed to wire money to Alameda’s account.”

“Silvergate had a strong incentive to continue accepting FTX and Alameda customer deposits and executing transfers because Silvergate’s business centered around the adoption of the FTX exchange platform and app.”

“It was foreseeable that allowing FTX customer funds to be deposited into non-FTX accounts would lead to fraud and harm the owners of those funds,” the order said.

Silvergate made income from the translation fees and interest deposited into FTX-related accounts. The order claims Silvergate’s annual income before FTX was $7.6 million — jumping to $75.5 million after it banked the exchange.

A highlighted excerpt of the judge’s order saying the class suit adequately alleged Silvergate knew and aided fraud at FTX. Source: CourtListener

The order said in Silvergate’s dismissal motion that the bank claimed it didn’t owe FTX customers a duty of care as its dealings alleged by the lawsuit “was not a substantial factor” in FTX customers’ inability to withdraw funds — that was instead the fault of FTX and co-founder Sam Bankman-Fried.

Related: Fed inspector blames crypto focus, nepotism for Silvergate Bank collapse

Silvergate also claimed that if it denied FTX’s transfers, the exchange would have found another bank — which the judge called “highly speculative” as it was “one of few banks willing to service the crypto industry.”

The judge’s green light came over a year after the lawsuits were filed in February 2023. Three separate class actions against Silvergate were combined in April.

Silvergate collapsed about a month later, in March 2023, just months after FTX had fallen into bankruptcy in November 2022.

Bankman-Fried was found guilty last November on seven charges relating to various fraud and money laundering. His sentencing date is set for March 28.

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