Biden Judge Allows Victims of Crypto Currency Scandal to Try to Recover Damages from Bank that Participated

Judge Ruth Montenegro, nominated by President Biden to the Southern District of California, rejected a motion to dismiss lawsuits brought by victims of crypto currency scandals against a large bank and investment company that allegedly participated and benefitted to the tune of billions of dollars. The March 2024 decision was in Bhatia v Silvergate Bank.

What happened in this case?

Numerous people have been victimized by the crypto-currency scandals involving Sam Bankman-Fried, who was recently sentenced to prison for committing fraud and stealing billions in customer funds. In early 2023, several class actions were filed in federal court to recover funds and damages.

But the lawsuits were not filed against him or the two primary entities he formed to carry out his schemes, crypto exchange SBX and trading firm Alameda Research, both of which had previously imploded and had no resources. Instead, the class actions were filed in California against Silvergate, a bank and investment orporation that had allegedly worked with Bankman-Fried and his two corporations and had gone "all in" on crypto currency. By 2022, SIlvergate had "$11.9 billion in deposits and over 1000 crypto clients."

The cases were assigned to Judge Montenegro. Silvergate filed a comprehensive motion to dismiss them without discovery. Its primary contention was that the victims were customers of Alameda and SBX, not Silvergate.

How Did Judge Montenegro Rule and Why Is it Important?

Judge Montenegro issued a careful 66-page decision that rejected the motion to dismiss and allowed the victims' case to go forward. She explained that the complaints "adequately alleged" that Silvergate had "knowingly aided and abetted" the "fraud and conversion of Plaintiffs' funds" by SBX and Alameda. She also noted that Silvergate allegedly "received and unjustly retained" significant funds "at Plaintiffs' expense." Judge Montenegro allowed all six of the legal claims against Silvegate to go forward, including aiding and abetting fraud, conversion and breach of fiduciary duty, unjust enrichment, negligence, and violation of California's Unfair Competition Law.

Silvergate has recently fallen on hard financial times, and it is unclear at best when victims will actually recover funds and damages from Silvergate and how much. Judge Montenegro's opinion is nevertheless important to those victims, and sets an important precedent concerning the ability of fraud victims to seek damages from banks and similar institutions that help carry out the fraud. In addition, the decision serves as a reminder of the importance of promptly confirming fair-minded nominees like Judge Montenegro to our federal courts.

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