San Diego’s federal court decision mandates Silvergate Bank to confront a class-action lawsuit initiated by FTX users, accusing the bank of facilitating fraudulent activities at the exchange and its affiliated trading firm, Alameda Research.
Despite Silvergate’s efforts to dismiss the case back in June, a federal judge dismissed the motion on Wednesday in the US District Court for the Southern District of California.
Judge Rejects Silvergate’s Attempt to Dismiss Lawsuit Involving FTX Fraud Claims In a ruling on March 20, Judge Ruth Bermudez Montenegro denied Silvergate’s motion to dismiss the lawsuit, affirming that the allegations by FTX users were substantial. The judge stated that Silvergate was allegedly aware of FTX’s fraudulent activities and profited from them, allegedly unjustly enriching itself at the expense of FTX users. However, Silvergate has denied all such allegations.
The court determined that Silvergate had a duty of care to FTX customers, primarily due to its Silvergate Exchange Network (SEN), which facilitated fund transfers to crypto exchanges. The judge emphasized that before the establishment of SEN, it would have been nearly impossible for a crypto exchange like FTX to operate.
However, Silvergate argued in its dismissal motion that it did not owe FTX customers any duty of care and that its alleged dealings were not a significant factor in the customers’ inability to withdraw funds. The judge found Silvergate’s arguments unpersuasive, stating that any harm alleged was mainly attributable to FTX and its co-founder, Sam Bankman-Fried.
Silvergate provided banking services to FTX and Alameda, handling transfers and accepting deposits that channeled FTX customer funds to Alameda’s account. The judge noted Silvergate’s strong incentive to continue these operations due to its reliance on FTX for business growth.
Moreover, the order highlighted that Silvergate’s revenue increased significantly after it began banking FTX, indicating its reliance on FTX-related activities for financial gains. It was deemed foreseeable that permitting the deposit of exchange customer funds into non-FTX accounts could result in fraud and harm to the fund owners.
The judge dismissed Silvergate’s argument that FTX would have found another bank if it had denied its transfers, considering it speculative, given the limited number of banks willing to service the crypto industry.
Three Lawsuits Consolidated Against Silvergate Over Alleged Involvement in FTX Fraud The judge’s decision came more than a year after the lawsuits were initially filed in February 2023. In April 2023, United States District Judge Jacqueline Scott Corley of the Northern District of California decided to consolidate the three lawsuits against Silvergate, each accusing the bank of aiding investor fraud by the defunct crypto exchange FTX.
The order stated that the Silvergate cases share common questions of law and fact, naming common defendants, arising from the same alleged course of conduct, and asserting overlapping causes of action, making consolidation appropriate.
FTX’s bankruptcy filing in November of the previous year caused liquidity issues for Silvergate, which subsequently disclosed plans for voluntary liquidation and cessation of operations in March 2023. Additionally, the bank faced a class-action lawsuit in January for securities law violations.
Bankman-Fried, FTX’s co-founder, was found guilty of seven fraud and money laundering charges last November as part of the FTX court case, with his sentencing scheduled for March 28.