In a significant legal development, Silvergate Bank has been ordered to face a class-action lawsuit filed by FTX users, who allege that the now-defunct bank facilitated fraudulent activities at the exchange and its associated trading firm, Alameda Research.
San Diego federal court Judge Ruth Bermudez Montenegro denied Silvergate's motion to dismiss, issued in June, asserting that the class-action plaintiffs presented sufficient evidence to suggest that Silvergate was aware of FTX's fraudulent practices and derived benefits from them at the expense of FTX users. Despite the accusations of unfairly enriching itself, the bank denies any wrongdoing.
The court's ruling establishes that Silvergate owed a duty of care to FTX customers, particularly due to its Silvergate trading network, which was primarily designed to facilitate fund transfers to cryptocurrency exchanges. The judge noted that before the advent of the Silvergate Exchange Network (SEN), transferring funds to exchanges like FTX was exceedingly challenging.
Silvergate provided banking services to both FTX and Alameda, processing transfers and accepting deposits, effectively directing FTX customers to wire funds to Alameda's account initially. The judge emphasized Silvergate's strong incentives to continue accepting deposits from FTX and Alameda customers, given the bank's focus on the adoption of the FTX trading platform and app.
The court found it foreseeable that allowing FTX customer funds to be deposited into non-FTX accounts could result in fraud and harm to the owners of those funds. Notably, Silvergate's revenue surged from $7.6 million to $75.5 million after its involvement with FTX, primarily due to translation fees and interest deposited into FTX-related accounts.
Silvergate had argued in its motion to dismiss that it did not owe FTX customers a duty of care, attributing the alleged inability of FTX customers to withdraw funds to FTX and its co-founders. The bank also contended that rejecting FTX's transfers would prompt the exchange to seek services elsewhere, a stance the judge criticized as opportunistic, given Silvergate's prominent role as one of the few banks willing to serve the crypto industry.
The lawsuit, initially filed in February 2023 and subsequently consolidated with three other class-action suits against Silvergate, gained approval from a judge after over a year of legal proceedings. These developments occurred against the backdrop of Silvergate's collapse in March 2023, following FTX's bankruptcy in November 2022. Furthermore, FTX co-founder Sam Bankman-Fried was found guilty last November on charges related to fraud and money laundering, with his sentencing scheduled for March 28.
