The San Diego federal court has made a significant ruling, stating that Silvergate Bank must face a class-action lawsuit filed by FTX users. The lawsuit 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, the federal court judge denied the motion in the US District Court for the Southern District of California.
In a court order on March 20, Judge Ruth Bermudez Montenegro denied Silvergate’s motion to dismiss the lawsuit. The judge ruled that the allegations made by the FTX users were sufficient, claiming that Silvergate was aware of FTX’s fraud and benefited from it, unjustly enriching itself at the expense of FTX users. The court found that Silvergate had a duty of care to FTX customers, particularly due to its Silvergate Exchange Network (SEN) which facilitated fund transfers to crypto exchanges.
Despite the ruling, Silvergate denied all the allegations. The bank argued that it did not owe FTX customers a duty of care and that its dealings were not a substantial factor in the customers’ inability to withdraw funds. Silvergate provided banking services to FTX and Alameda, processing transfers and accepting deposits that directed FTX customer funds to Alameda’s account.
The court order pointed out that Silvergate’s income grew significantly after it began banking FTX, increasing from $7.6 million to $75.5 million annually. The revenue was generated from translation fees and interest deposited into FTX-related accounts. The judge noted that Silvergate had a strong incentive to continue these operations due to its reliance on the exchange for business growth.
The ruling came more than a year after the lawsuits were initially filed in February 2023. United States District Judge Jacqueline Scott Corley of the Northern District of California decided to consolidate the lawsuits against Silvergate. Each lawsuit accuses Silvergate of aiding investor fraud by the collapsed crypto exchange FTX.
Bankman-Fried, the founder of FTX, was found guilty of seven fraud and money laundering charges as part of the FTX court case. His sentencing date is set for March 28th. The collapse of FTX in November of the previous year caused liquidity problems for Silvergate, leading to the bank’s disclosure of plans to “voluntarily liquidate” assets and shut down operations. Additionally, the bank faced a class-action lawsuit in January for securities law violations.
The ruling against Silvergate Bank signifies a legal battle that has broad implications for the crypto industry. The court’s decision to allow the class-action lawsuit to proceed sheds light on the responsibility of financial institutions in ensuring the protection of customer funds and preventing fraud. As the case progresses, it will be interesting to see the outcomes and potential ramifications for both the bank and the individuals involved in the alleged misconduct.
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