A lawsuit has been filed against Silvergate Bank and its parent company, Silvergate Capital Corporation, accusing them of aiding and abetting a multibillion-dollar fraudulent scheme orchestrated by Sam Bankman-Fried, the CEO of the cryptocurrency exchange FTX and the cryptocurrency hedge fund Alameda Research LLC. The lawsuit was filed by FTX users.
Silvergate’s dependence on the cryptocurrency industry
Silvergate Bank had become one of the few US banks that catered to cryptocurrency-related exchanges, funds, and customers. This enabled the bank to grow from a small regional bank into a national bank with more than $12 billion in deposits.
Because the bank didn’t have to pay interest on deposits to crypto companies, it was able to invest those deposits in low-risk securities that generated hundreds of millions of dollars in revenue for the bank. Soon, it became entirely dependent on the crypto industry, which comprised 90% of its deposits and nearly all of its profits.
Silvergate also developed a proprietary network called the “Silvergate Exchange Network” (SEN), which allowed exchanges like FTX to offer its customers a 24/7 trading platform for cryptocurrency. In early November 2022, FTX filed for Chapter 11 bankruptcy protection.
FTX’s involvement
FTX was one of the major depositors in Silvergate and the largest user of the SEN network. SEN was also one of FTX’s primary means of payment.
Bankman-Fried, the primary owner of FTX, has acknowledged to utilizing nearly $10 billion in client assets for Alameda, a separate firm owned by Bankman-Fried that specializes in complex and dangerous crypto trading. This information was disclosed in a recent regulatory filing.
Importantly, Silvergate retained the accounts of both FTX and Alameda while being aware that FTX housed investor assets, that Alameda participated in dangerous trading, and that billions of dollars worth of client monies from FTX were sent directly to Alameda and affiliated businesses.
The lawsuit claims that the bank provided significant assistance to FTX by allowing FTX to continue using its accounts and the SEN network despite the fact that the crypto bank was aware of what was taking on and should have known better.
The case is an attempt to recoup part of the nearly $8 billion in client monies that were stolen from FTX. These funds include funds belonging to the plaintiff, Soham Bhatia, as well as about one million additional customers.
The lawsuit contends that these losses would not have occurred if Silvergate had stopped giving FTX access to its accounts and the SEN network when it saw what FTX and Bankman-Fried were doing.
Silvergate Bank and Silvergate Capital Corporation, as well as Alan J. Lane, the CEO of Silvergate Bank and the president and director of Silvergate Capital, have been named as defendants in the lawsuit.
The court has subject matter jurisdiction over the case under the Class Action Fairness Act of 2005 because the matter in controversy exceeds $5 million, exclusive of interest and costs, and there are members of the proposed class who are citizens of different states than the defendants.
In addition, the court has personal jurisdiction over the defendants because of the extensive, ongoing, and systematic nature of the defendants’ interactions with the state of California.
