Silvergate Bank finds itself embroiled in a legal battle as customers of the now-defunct cryptocurrency exchange FTX file a class-action lawsuit against the bank.
The lawsuit alleges that Silvergate played a role in fraudulent activities associated with FTX and its sister firm Alameda Research. Despite Silvergate’s attempts to have the case dismissed, a federal judge in San Diego, Ruth Bermudez Montenegro, ruled against the bank, allowing the lawsuit to proceed.
Judge Montenegro’s ruling indicates that the plaintiffs have presented sufficient evidence to support their claims that Silvergate turned a blind eye to FTX’s fraudulent practices, leading to unjust enrichment at the expense of users.
The court highlighted the Silvergate Exchange Network (SEN) as pivotal for FTX operations, suggesting the bank’s responsibility in safeguarding the interests of FTX clients.
According to the court, the SEN facilitated transactions that inadvertently redirected user funds from FTX to Alameda Research. Initially, with FTX lacking its own bank account, customer transfers were directly made to Alameda’s account, raising concerns of potential negligence on Silvergate’s part.
The court’s decision also shed light on Silvergate’s financial gains from its association with FTX. Annual revenue surged from $7.6 million to $75.5 million following the integration of the exchange platform. These gains were attributed to transaction fees and interests generated from FTX-associated accounts.
Silvergate attempted to argue in its motion for dismissal that it owed no duty to FTX clients, attributing withdrawal difficulties to FTX and its co-founder Sam Bankman-Fried. However, the court dismissed this argument, emphasizing Silvergate’s pivotal role in serving the crypto sector and its rejection of FTX transactions as a significant factor.
The lawsuit’s progression comes after its initial filing in February 2023, with three separate class actions against Silvergate consolidated in April. The bank’s subsequent bankruptcy declaration in March 2023 closely followed the bankruptcy of FTX in November 2022. Sam Bankman-Fried, the co-founder of FTX, has since been convicted on fraud and money laundering charges and awaits sentencing.
