Judge Allows Class Action Suit Accusing Silvergate Bank of Aiding FTX Fraud

• US District Judge Bermudez Montenegro denied Silvergate Bank’s, the defendant, motion to dismiss the class action filed by several complainants led by Soham Bhatia.

• Silvergate Capital announced the closure of its operations and liquidated all assets belonging to Silvergate Bank in March last year following the collapse of FTX and Alameda Research.

The collapse of the FTX exchange and its sister firm Alameda Research in late 2022 heavily impacted the former crypto-friendly bank Silvergate Capital Corp, the holding company for Silvergate Bank. As Silvergate opted to wind down its operations early last year, it was reported that FTX was one of its major customers, and the regulatory space was not friendly. 

Nonetheless, Silvergate announced late last year that it had fully repaid all the remaining deposit liabilities as the liquidation process continued. Consequently, the California-based bank indicated that it only had less than $10,000 in its balance sheet. 

However, the latest revelations show Silvergate Capital is not fully out of the woods, as it faces a glaring class action in the coming months.

Silvergate’s Troubles Escalates

According to a court document filed on Thursday, March 20, 2024, to the United States District Judge Bermudez Montenegro from the Southern District of California, the motion by plaintiff Soham Bhatia and other members against Silvergate Capital has been granted. Notably, Silvergate will be defending itself against six charges in the court of law after Judge Montenegro denied its motion to dismiss the plaintiff’s class action.

“.. Aiding and abetting fraud against all Defendants. Aiding and abetting breach of fiduciary duty against all Defendants. Unjust enrichment against the Silvergate Defendants. Aiding and abetting conversion against all Defendants. Violations of California’s Unfair Competition Law (“UCL”), California Business and Professions Code against all Defendants. Negligence against all Defendants,” the court documents noted.

Judge Montenegro noted that the court finds the matter suitable for determination without oral presentation. Furthermore, the court understands that FTX assured its customers that their funds and assets were stored safely in a segregated bank account only to end up in a bankrupt condition. 

According to the court filing, Silvergate’s annual income increased by a factor of 10 from $7.6 million before the FTX deposits. Additionally, Silvergate’s attempts to deny FTX bank transfers were late as the majority of the funds had already been moved.

“Silvergate had a strong incentive to continue accepting FTX and Alameda customer deposits and executing transfers because Silvergate’s business centered around the adoption of the FTX exchange platform and app. It was foreseeable that allowing FTX customer funds to be deposited into non-FTX accounts would lead to fraud and harm the owners of those funds,” the court filing further noted.

Market Impact

The impact of the Silvergate Capital collapse on the cryptocurrency has significantly faded as demonstrated by the rebound to over $2.6 trillion in market cap. Additionally, Bitcoin price recently reached its new all-time high around $74k and Solana (SOL), which was mostly impacted by FTX’s implosion, is near its ATH than the bear market low.

Meanwhile, the cryptocurrency market continues to feel the impact as global regulatory oversights tighten, with some banks blocking crypto-related payments.