Class Action Suit Against Silvergate Bank Over FTX Fraud Allegations Moves Forward After Judge’s Ruling

FTX users are suing the now-defunct Silvergate by claiming it abetted FTX and its affiliated trading firm Alameda Research to commit a historic fraud.

According to the customers launching the suit, FTX knowingly transferred customer money into Alameda Research. FTX is currently on trial for numerous offences related to fraud and money laundering charges.

Central to the case is the allegation that FTX illegally wired Alameda Research customer funds to cover the cracks in its balance sheet after the trading company made some risky crypto bets.

On March 20, Judge Ruth Bermudez Montenegro of a San Diego federal court filed an order denying Silvergate’s motion to dismiss the case.

Montenegro ruled that the customers had adequately presented a case for Silvergate knowing and participating in FRX’s fraud in their filing on March 19.

“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,” said the order.

The numbers ostensibly speak for themselves. According to the order, Silvergate’s annual income before taking on FTX as a client was $7.6 million. The bank’s post-FTX income was nearly ten times higher, at $75.5 million, through transaction fees and interest on money deposited in FTX and Alameda accounts.

The court also ruled that Silvergate’s earlier assertion that it doesn’t owe a duty of care to FTX customers is incorrect. Silvergate’s argument rests on the fact that the bank was not directly responsible for the withdrawal freezes that spread panic when FTX began to collapse.

The bank also argued that had it not dealt with FTX, the exchange would have found another bank, an assertion that the judge labeled called “highly speculative” because Silvergate “one of few banks willing to service the crypto industry.”

Like Silvergate: 3AC Also Denies Wrongdoing

Another company at the heart of 2022’s industry-wide recession, dubbed “crypto winter”, came under media scrutiny this week after its co-founder denied responsibility in the collapse.

Kyle Davies, the founder of collapsed crypto hedge fund Three Arrows Capital (3AC) told his interviewer in the latest episode of Unchained that he feels he has nothing to apologise for. 

“Am I sorry for a company going bankrupt? No, like companies go bankrupt, almost every company goes bankrupt, right?” reasoned Davies, in response to criticisms that he had shown no remorse when his company failed. 

In May 2022, a huge crypto project called Terra collapsed when its dollar-pegged stablecoin UST slipped its peg and spiralled down to nothing.

Terra sold UST on the promise that an algorithm could peg it to the greenback by burning $1 dollars worth of a sister token called LUNA to create it. In order to redeem it, holders burned UST for equivalent amounts of LUNA. 

The mechanism failed, however, after too many people exited UST at once, causing the algorithm to nosedive into a hyper-inflationary spiral.

At the time when Terra collapsed, 3AC had $200 million to half a billion LUNA tokens. The industry-wide contagion from UST’s historic depegging is also considered a factor in FTX’s downfall. 

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