Silvergate Bank Aiding and Abetting Crypto Fraud Class Action

November 2022 exposed Sam Bankman-Fried’s fraud and embezzlement involving his cryptocurrency exchange FTX and cryptocurrency hedge fund Alameda Research. But how was he able to dsitribute funds among FTX, Alameda, and himself? This class action brings suit against Silvergate Bank, its parent Silvergate Capital Corporation, and CEO Alan J. Lane, for aiding and abetting the fraudulent scheme.

The class for this action is all persons who, as of November 11, 2022, held legal title to any fiat or cryptocurrency deposited or invested through an FTX platform.

Most banks stay away from cryptocurrency, the complaint alleges, but Silvergate profited from it in a number of ways. First, it went from a small regional bank to a national bank with over $12 billion in deposits.

Second, because it did not have to pay interest on cryptocurrency deposits, it could invest the deposits in low-risk securities and earn an enormous amount of profit for the bank.

Third, it developed the Silvergate Exchange Network (SEN). The complaint alleges, “SEN allowed exchanges like FTX to offer its customers, for the first time, a 24-hour-a-day, seven-days-a-week trading platform for trading in cryptocurrency.

In November 2022, FTX filed for bankruptcy. The complaint alleges, “FTX’s majority owner, Bankman-Fried, acknowledged publicly that he used about $10 billion in FTX customer funds for Alameda, a separate, Bankman-Fried-owned company that engaged in complicated and risky crypto trading.” The complaint calls SEN “the largest ‘on-ramp/off-ramp’ network in crypto.”

This was possible, the complaint alleges, because Silvergate held the accounts of both entities: “It knew FTX held investor funds. It knew Alameda engaged in risky trading. It saw billions of dollars of investor money transferred out of FTX and into Alameda, then out of Alameda to pay Alameda’s debts and to enrich Bankman-Fried and his inner circle.” But it did nothing, the complaint claims, to question or stop these processes.

The complaint details the various ways in which banks are supposed to become aware of suspicious transactions. For example, banks are required to have Know Your Customer programs.

The complaint alleges, “Customer due diligence requires Silvergate to know what business a customer is in, and to understand the types of transactions a customer should, and actually does, make. When monitoring its customers’ accounts, Silvergate is obligated to comply with the Bank Secrecy Act (BSA), including regulations broadening its anti-money laundering provisions.” Silvergate is supposed to have a program to ensure compliance with BSA, including internal controls and testing its compliance.

It must also be able to recognize unusual or suspicious transactions by customers, with programs that are more stringent where risks are highest. Similarly, if it sees signs of money laundering, it is required to take appropriate action.

Still, the complaint claims, Silvergate permitted transfers from FTX to Alameda and allowed FTX customers to deposit funds in Alameda accounts. The complaint alleges, “These commingled funds were then paid out indiscriminately for various purposes” including for Alameda’s hedge-fund trading or for the benefit of Bankman-Fried and his partners.

Article Type: Lawsuit
Topic: Fraud
Tags: Aiding and Abetting, Aiding and Abetting Fraud, Cryptocurrency, Your Bank