Judge Greenlights Division Alleges Silvergate Bank Assisted FTX Fraud

Silvergate Bank is facing a class-action lawsuit from FTX users who say the now-defunct bank was defrauded by the exchange and its affiliated business, Alameda Research.

In a March 20 order, San Diego Federal District Court Judge Ruth Bermudez Montenegro denied Silvergate's motion to dismiss in June, arguing that the class action had sufficient knowledge that Silvergate was aware of the FTX fraud but took advantage of FTX users and unjustly enriched itself by FTX users — the bank denied. .

The court found that Silvergate owed a duty of care to FTX customers because the Silvergate exchange network – created to move funds to crypto exchanges – was largely for the benefit of FTX customers and “a crypto exchange like FTX would have been virtually impossible before SEN.”

Silvergate banked both FTX and Alameda and “received transfers and deposits of FTX customer funds to Alameda,” the judge wrote. “FTX initially did not have a bank account, so customers were told to send money to the Alameda account.”

“Silvergate had a strong incentive to continue accepting FTX and Alameda's customer deposits and making transfers because Silvergate's business is focused on accepting FTX's exchange platform and application.”

“It was foreseeable that allowing FTX client funds to be deposited into non-FTX accounts would lead to fraud and harm the owners of those funds,” the order said.

Silvergate received revenue from translation fees and interest deposited into accounts linked to FTX. The order says Silvergate's annual revenue before FTX was $7.6 million — jumping to $75.5 million after banking the exchange.

The order said in Silvergate's motion to dismiss that the bank owed no duty of care to FTX's customers, saying it was “not a substantial factor” in the suit's failure to withdraw funds — rather, it was at fault. FTX and co-founder Sam Bankman-Fried.

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Silvergate said the exchange would find another bank if it rejected the FTX transfers — which the judge called “very speculative” as “one of the few banks willing to serve the crypto industry.”

The judge's green light came a year after the charges were filed in February 2023. Three separate class actions against Silvergate were filed in April.

A few months after FTX went bankrupt in November 2022, Silvergate went bankrupt about a month later, in March 2023.

Bankman-Fried was found guilty of seven counts related to various types of fraud and money laundering. Sentencing is scheduled for March 28.

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