US judge rules in favour of FTX users against defunct Silvergate Bank

A San Diego federal court judge has merited a class action by FTX users against the defunct Silvergate Bank for its role in aiding fraud against them before the exchange collapsed. Judge Ruth Bermudez Montenegro declined Silvergate’s dismissal motion, finding the class action sufficiently justified for the bank’s dealings with FTX and its trading firm, Alameda Research.

In an order dated March 20, the judge agreed with the class group that Silvergate was aware of FTX fraud. The class group had alleged that Silvergate unjustly benefited by aiding fraud at the expense of FTX users. The bank had denied the allegations.

The judge noted that Silvergate unjustly banked customer deposits for FTX. Since FTX did not initially own a bank account, customers were redirected to Alameda. According to the ruling, allowing FTX customers to deposit funds into non-FTX accounts “would lead to fraud and harm the owners of those funds.” The judge further stated:

Silvergate had a strong incentive to continue accepting FTX and Alameda customer deposits and executing transfers because Silvergate’s business centred around the adoption of the FTX exchange platform and app.

Silvergate owed a duty of care

The federal judge faulted the Silvergate Exchange Network (SEN), which was created to help customers move their funds to crypto exchanges. She said that SEN was largely meant to benefit FTX customers, noting that the bank owed them a duty of care.

In response to Silvergate’s claim that the bank didn’t owe FTX customers a duty of care in the dismissal motion, the judge said it “was not a substantial factor.” Instead, she said it was the fault of FTX and its co-founder Sam Bankman-Fried.

The US judge also rubbished Silvergate’s claims that FTX would have found another bank if it denied the exchange to conduct the transfers. Terming the assertion as “highly speculative,” the judge said Silvergate was among the “few banks willing to service the crypto industry.” The judgement ends a long-standing case filed by the plaintiffs in February 2023. Three other class actions against the bank were brought in April of the same year.

Silvergate collapsed in March 2023, a few months after FTX filed for bankruptcy in November 2022. It is estimated that Silvergate’s annual income was $7.6 million before the FTX dealings, rising to $75.5 million after processing customer funds for the exchange.

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