The recent ruling by the San Diego federal court has brought to light the involvement of Silvergate Bank in aiding fraud at the exchange FTX and its associated trading firm, Alameda Research. Despite Silvergate’s attempt to dismiss the case in June, a federal court judge denied the motion, emphasizing that the bank had a duty of care to FTX customers due to its Silvergate Exchange Network (SEN). The judge ruled that Silvergate was aware of FTX’s fraud but benefited from it, leading to unjust enrichment at the expense of FTX users.
While Silvergate denied all allegations against them, the judge found their arguments unconvincing. The bank provided banking services to FTX and Alameda, processing transfers and accepting deposits that directed FTX customer funds to Alameda’s account. Silvergate’s income saw a significant surge after it began banking FTX, highlighting a strong incentive to continue these operations for business growth. The court emphasized the foreseeable harm caused by allowing exchange customer funds to be deposited into non-FTX accounts, leading to fraud and harm to the owners of those funds.
The lawsuits against Silvergate were initially filed in February 2023, with United States District Judge Jacqueline Scott Corley deciding to consolidate them in April 2023. The consolidated lawsuits accuse Silvergate of aiding investor fraud by the collapsed crypto exchange FTX, highlighting common questions of law and fact. The cases were found to arise from the same alleged course of conduct, leading to overlapping causes of action.
FTX filed for bankruptcy in November of the previous year, leading to liquidity problems for Silvergate. Following a bank run, Silvergate disclosed its plans to “voluntarily liquidate” assets and shut down operations about a month later. Additionally, the bank faced a class-action lawsuit in January for securities law violations, further complicating the situation. Founder Sam Bankman-Fried was found guilty of fraud and money laundering charges as part of the FTX court case.
The ruling against Silvergate Bank sheds light on the complex web of involvement in the FTX fraud case. Despite the bank’s denial of all allegations, the court found sufficient evidence to proceed with a class-action lawsuit filed by FTX users. The consolidation of lawsuits against Silvergate further emphasizes the severity of the situation and the need for accountability in cases of financial fraud. It remains to be seen how the legal proceedings will unfold and what implications they will have for both the bank and the individuals involved.