Silvergate Bank and its CEO Alan Lane face allegations of aiding a multibillion-dollar fraudulent scheme by FTX and Alameda Research in a proposed class action lawsuit filed in the United States District Court on February 14th.
The lawsuit was filed on behalf of an FTX user who lost about $20,000 in cryptocurrency due to the exchange’s collapse. The plaintiff claims that Silvergate Bank and Lane were cognizant of Alameda Research’s use of FTX customer funds and kept FTX’s true nature hidden from its customers.
Silvergate Bank is one of the few banks in the US that cater to cryptocurrency-related exchanges, funds, and customers. The Bank emerged from a small regional bank into a national bank with more than $12 billion in deposits.
The lawsuit alleges that Silvergate’s proprietary network, called the “Silvergate Exchange Network” (SEN) allowed exchanges like FTX to offer their customers a 24-hour-a-day trading platform. This platform enabled customers to trade in cryptocurrency seven days a week, according to the lawsuit.
FTX, which was one of the largest depositors in Silvergate Bank and the largest user of the SEN network, filed for Chapter 11 bankruptcy protection in early November 2022.
SBF acknowledged publicly that he used about $10 billion in SBF crypto exchange’s customer funds for Alameda. The Bank held the accounts of both SBF companies and knew that billions of dollars of investor money were transferred out of the exchange and into Alameda, then out of Alameda to pay Alameda’s debts and to enrich Bankman-Fried and his inner circle.
The lawsuit seeks to recover some of the losses from approximately $8 billion in the exchange’s customer funds, including the plaintiff’s funds and about one million others that have been lost.
According to the statement:
Because Silvergate aided and abetted the Bankman-Fried and FTX’s fraud and breach of fiduciary duty, it would be inequitable for Silvergate to retain the benefits it generated from monies of Class Plaintiff and class members.
The Allegations Against The Bank In the FTX Lawsuit
The lawsuit also stated that the Bank knew what SBF was doing, but none of the customers. According to the lawsuit, Silvergate Bank could have cut the crypto exchange’s access to its accounts and SEN network when it discovered its actions.
With Silvergate’s stringent “Know Your Customer” processes, the defendants knew exactly what business FTX and Alameda conducted. They knew that FTX was an exchange that held billions of dollars of customer funds in its account at Silvergate. They knew that Alameda was a hedge fund that engaged in speculative, risky, crypto-related trades.
The lawsuit claims that with Silvergate’s stringent account-monitoring procedures. Which included proprietary automated processes employed in aid of a large staff of AML/BSA analysts. The defendants also saw the transactions that plainly revealed the fraud.
The defendants saw billions of dollars in funds transfers from the FTX account to the Alameda account. The frequency and amount of these transfers easily alerted Silvergate’s risk department, headed by Lane’s son-in-law, Tyler J. Pearson.
Moreover, through Silvergate’s AML/BSA processes, the defendants saw billions of dollars of fiat currency funds. However, sent directly to Alameda accounts from FTX customers in relatively small denominations. Taken together at a velocity reaching billions of dollars, these deposits had no legitimate explanation.
However, the lawsuit asserted that:
Finally, there is no evidence that Defendants ever alerted authorities of what FTX and Alameda were doing. No regulatory consent order was ever issued against FTX or Alameda before they went bankrupt.