A proposed class action alleges Silvergate Capital Corporation and its chief executive and risk officers were complicit in and enabled massive losses linked to last month’s FTX implosion in that they “knowingly or negligently” allowed the collapsed cryptocurrency exchange to direct customer deposits to Alameda Research, a hedge fund owned by embattled FTX founder and CEO Sam Bankman-Fried.
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The 47-page lawsuit out of California alleges Silvergate failed to comply with federal know-your-customer and anti-money-laundering laws designed to ensure that banks perform due diligence, especially for accounts established or maintained for foreign financial institutions, in order to reasonably detect and report known or suspected suspicious activity. Had Silvergate complied with the law, it would have known that “numerous transactions” sent to Alameda Research were not intended to go to the hedge fund, but were instead intended for deposit with FTX, the suit contends.
“Had Silvergate conducted even a cursory review of FTX’s audits, it would have been aware of the serious issues plaguing its corporate control,” the lawsuit charges. “Silvergate either reviewed FTX and Alameda audits and ignored their red flags, or simply chose not to request audits.”
According to the case, Silvergate is a bank that serves exchanges, institutional investors and stablecoin issuers in the cryptocurrency industry, with customers such as Coinbase, Kraken, Bitstamp, Gemini and Crypto.com. Its most notable customer, the suit says, was FTX, who on November 11 filed for emergency Chapter 11 bankruptcy protection after “rampant fraud and corporate malfeasance” left more than a million debtors with billions in losses.
As of June 2022, Silvergate had roughly 1,500 institutional clients, with a total of approximately $12 billion on deposit. According to the filing, FTX, which before its collapse was the second largest cryptocurrency exchange in the world, represented nearly 10 percent of Silvergate’s deposits, evidencing the companies’ “close relationship.” Bankman-Fried personally endorsed Silvergate as providing “revolutionized banking for blockchain companies,” the complaint adds.
The apparent house of cards began to fall for FTX early last month when CoinDesk released a report that found that, even though FTX and Alameda were ostensibly separate companies, the latter’s balance sheet was mostly comprised of FTT, the token invented by FTX. According to CoinDesk, it appeared that in the wake of massive losses incurred by Alameda in the second quarter of 2022, when the Luna cryptocurrency collapsed, FTX was “lending Alameda money against these illusory assets,” the suit relays. Overall, the CoinBase report called into question FTX’s liquidity, the filing says.
From there, the case relays, FTX’s main competitor, Binance, announced that it was liquidating $530 million worth of FTT tokens, causing customers to race to pull their money out of the platform. Ultimately, an estimated $6 billion was withdrawn from FTX over 72 hours, with the value of FTT plunging 32 percent in the same time frame, the suit states.
What came next for FTX was no better, the lawsuit says, as the platform announced on November 8 that it would be bought by Binance, only to walk back that announcement the following day after Binance, during due diligence, found that customer funds had been mishandled.
According to an FTX balance sheet leaked on November 10, the platform held just $900 million in liquid assets against $8.9 billion of liabilities, the lawsuit states. The following day, FTX filed for Chapter 11 bankruptcy protection, and Bankman-Fried resigned as CEO.
As the complaint tells it, FTX was a “crucial” client of Silvergate. The case charges that “ordinary due diligence” by Silvergate would have revealed suspicious activity and required reporting.
“For example, it would be extremely unusual and suspicious for a hedge fund to receive the high volume of transfers or deposits, in relatively small amounts, from a high number of distinct persons, that was occurring with Alameda Research,” the lawsuit states, stressing that all of the accounts held by Bankman-Fried’s companies were available to view by Silvergate.
According to the case, Silvergate’s failure to perform proper due diligence “enabled FTX’s fraud” and the loss of possibly billions of FTX customer deposits.
The lawsuit looks to cover all persons who, as of November 11, 2022, had legal title to any fiat or cryptocurrency unable to be withdrawn from FTX, including from both the company’s U.S. and international platforms.
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