San Diego Federal Court Rejects Silvergate’s Motion to Dismiss in FTX Fraud Litigation

The federal court in San Diego has determined that Silvergate Bank must confront a class-action lawsuit initiated by FTX users, which claims that the bank facilitated fraudulent activities at the exchange and its affiliated trading firm, Alameda Research.

Despite Silvergate’s efforts to have the case dismissed in June, a federal judge rejected the motion on Wednesday in the US District Court for the Southern District of California.

Judge Rejects Silvergate’s Motion to Dismiss Lawsuit Regarding FTX Fraud Claims

In a court order dated March 20, Judge Ruth Bermudez Montenegro denied Silvergate’s motion to dismiss the lawsuit. The judge concluded that the allegations made by FTX users were adequate, asserting that Silvergate was aware of FTX’s fraudulent activities but profited from them and unjustly enriched itself at the expense of FTX users. However, the bank has denied all these allegations.

The court determined that Silvergate had a duty of care to FTX customers, particularly due to its Silvergate Exchange Network (SEN), which was established to facilitate fund transfers to cryptocurrency exchanges. The judge highlighted that a crypto exchange like FTX would have been nearly impossible to establish without the creation of SEN.

In its motion to dismiss, Silvergate contended that it did not owe a duty of care to FTX customers and that its actions, as outlined in the lawsuit, were not a significant factor in the customers’ inability to withdraw funds. The bank further claimed that any alleged damage was primarily the responsibility of FTX and its co-founder, Sam Bankman-Fried; the judge found these assertions unpersuasive.

Importantly, Silvergate provided banking services to both FTX and Alameda, managing transfers and accepting deposits that directed FTX customer funds to Alameda’s account, as FTX initially did not have a bank account. The judge noted Silvergate’s strong motivation to maintain these operations due to its dependence on the exchange for business expansion.

Moreover, the order indicated that Silvergate’s revenue increased from $7.6 million to $75.5 million annually after it began providing banking services to FTX, with income generated from transaction fees and interest accrued on FTX-related accounts. The order stated that it was foreseeable that permitting customer funds to be deposited into non-FTX accounts would result in fraud and harm to the owners of those funds.

Silvergate argued that had it refused FTX’s transfers, the exchange would have sought another banking partner, a claim the judge regarded as highly speculative, considering the limited number of banks willing to serve the crypto sector.

However, the judge dismissed these claims as “highly speculative,” noting that Silvergate was among the few banks prepared to cater to the crypto industry.

Three Lawsuits Against Silvergate Merged Over Claims of Assistance in FTX Fraud

The judge’s approval came more than a year after the lawsuits were first filed in February 2023. In April 2023, United States District Judge Jacqueline Scott Corley of the Northern District of California decided to merge the three lawsuits against Silvergate. Each lawsuit accuses Silvergate of facilitating investor fraud by the defunct crypto exchange FTX.

Four former investors initiated these cases and remain distinct from other federal lawsuits against FTX and its founder, Sam Bankman-Fried. However, they will be consolidated by mutual agreement among the litigants, according to a report from Law360 on April 19.

The order stated, “The Silvergate cases involve common questions of law and fact, as they name common defendants, arise from the same alleged course of conduct, and assert overlapping causes of action, such that the Silvergate cases are appropriate for consolidation.”

FTX filed for bankruptcy in November of the previous year, leading to liquidity challenges for Silvergate. Following a bank run, Silvergate announced its intention to “voluntarily liquidate” assets and cease operations about a month later, in March 2023. Additionally, the bank faced a class-action lawsuit in January for violations of securities laws.

Bankman-Fried was convicted of seven counts of fraud and money laundering last November as part of the FTX court proceedings. His sentencing date is set for March 28.

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