San Diego Federal Court Denies Silvergate’s Dismissal Motion in FTX Fraud Case

The San Diego federal court has ruled that Silvergate Bank must face a class-action lawsuit filed by FTX users which alleges that the bank aided fraud at the exchange and its associated trading firm, Alameda Research.

Despite Silvergate’s attempt to dismiss the case in June, a federal court judge denied the motion on Wednesday in the US District Court for the Southern District of California.

Judge Denies Silvergate’s Motion to Dismiss Lawsuit Over FTX Fraud Allegations

In a court order on March 20, Judge Ruth Bermudez Montenegro denied Silvergate’s motion to dismiss the lawsuit. The judge ruled that the FTX users allegations were sufficient, asserting that Silvergate was aware of FTX’s fraud but benefited from it and unjustly enriched itself at the expense of FTX users. However, all these allegations were denied by the bank.

The court found that Silvergate had a duty of care to FTX customers, mainly because of its Silvergate Exchange Network (SEN) which was designed to facilitate fund transfers to crypto exchanges. The judge emphasized that a crypto exchange like FTX was virtually impossible before establishing SEN.

However, in its motion to dismiss, Silvergate argued that it did not owe FTX customers a duty of care and that its dealings, as alleged in the lawsuit, were not a substantial factor in the exchange customers’ inability to withdraw funds. The bank further stated that any alleged harm was primarily the fault of FTX and its co-founder, Sam Bankman-Fried; the judge found these claims unconvincing.

Notably, Silvergate provided banking services to FTX and Alameda, processing transfers and accepting deposits that directed FTX customer funds to Alameda’s account since FTX initially lacked a bank account. The judge noted Silvergate’s strong incentive to continue these operations due to its reliance on the exchange for business growth.

Furthermore, the order noted that Silvergate’s income surged from $7.6 million to $75.5 million annually after it began banking FTX, with revenue generated from translation fees and interest deposited into FTX-related accounts. The order stated that it was foreseeable that allowing the exchange customer funds to be deposited into non-FTX accounts would lead to fraud and harm to the owners of those funds.

Silvergate argued that if it had denied FTX’s transfers, the exchange would have found another bank, a claim the judge deemed highly speculative, given the limited number of banks willing to service the crypto industry.

However, the judge dismissed these arguments as “highly speculative,” noting that Silvergate was one of the few banks willing to service the crypto industry.

Three Lawsuits Against Silvergate Consolidated Over Allegations of Aid in FTX Fraud

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

Four former investors brought these cases and remain separated from other federal cases against FTX and its founder, Sam Bankman-Fried. However, they will be combined by the litigants’ mutual agreement, 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, causing liquidity problems for Silvergate. Following a bank run, Silvergate disclosed its plans to “voluntarily liquidate” assets and shut down operations about a month later, in March 2023. Additionally, the bank faced a class-action lawsuit in January for securities law violations.

Bankman-Fried was found guilty of seven fraud and money laundering charges last November as part of the FTX court case. His sentencing date is March 28.