Class Action Lawsuit Against Silvergate Bank Regarding FTX Fraud Claims Advances Following Judge’s Decision

FTX users are initiating legal action against the now-defunct Silvergate, alleging that it facilitated FTX and its associated trading entity, Alameda Research, in executing a significant fraud.

The plaintiffs in the lawsuit assert that FTX intentionally diverted customer funds to Alameda Research. Currently, FTX is undergoing a trial for various charges linked to fraud and money laundering.

At the heart of the case is the claim that FTX unlawfully transferred customer funds to Alameda Research to mask deficiencies in its financial statements following the trading firm’s high-risk cryptocurrency investments.

On March 20, Judge Ruth Bermudez Montenegro of a federal court in San Diego issued an order rejecting Silvergate’s request to dismiss the lawsuit.

Montenegro determined that the plaintiffs had sufficiently established a case indicating Silvergate’s awareness and involvement in FTX’s fraudulent activities in their submission on March 19.

“It was foreseeable that permitting FTX customer funds to be deposited into non-FTX accounts would result in fraud and harm the owners of those funds,” stated the order.

The figures reportedly illustrate the situation clearly. As per the order, Silvergate’s annual revenue prior to engaging FTX as a client was $7.6 million. Following its association with FTX, the bank’s income surged to nearly ten times that amount, reaching $75.5 million, primarily from transaction fees and interest on funds held in FTX and Alameda accounts.

The court also concluded that Silvergate’s previous claim of lacking a duty of care towards FTX customers was erroneous. Silvergate’s defense was based on the premise that it was not directly accountable for the withdrawal freezes that incited panic when FTX began to fail.

The bank further contended that if it had not partnered with FTX, the exchange would have sought another banking institution, a claim the judge deemed “highly speculative” given that Silvergate was “one of the few banks willing to serve the crypto sector.”

Like Silvergate: 3AC Also Denies Wrongdoing

Another entity central to the 2022 industry-wide downturn, referred to as “crypto winter,” faced media attention this week after its co-founder disavowed responsibility for the collapse.

Kyle Davies, the co-founder of the defunct crypto hedge fund Three Arrows Capital (3AC), expressed in a recent episode of Unchained that he believes he has no reason to apologize.

“Am I sorry for a company going bankrupt? No, companies go bankrupt; nearly every company goes bankrupt, right?” Davies reasoned in response to criticisms regarding his apparent lack of remorse following his company’s failure.

In May 2022, a significant crypto project known as Terra collapsed when its dollar-pegged stablecoin UST lost its peg and plummeted to zero.

Terra marketed UST with the assurance that an algorithm could maintain its peg to the dollar by burning $1 worth of a related token called LUNA to generate it. To redeem it, holders exchanged UST for corresponding amounts of LUNA.

However, the mechanism faltered when too many individuals withdrew UST simultaneously, leading the algorithm to spiral into a hyper-inflationary collapse.

At the time of Terra’s downfall, 3AC held between $200 million and half a billion LUNA tokens. The widespread fallout from UST’s unprecedented depegging is also viewed as a contributing factor to FTX’s demise.

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