Silvergate, Signature banks' woes pose new obstacle for FTX customers

By Alison Frankel

(Reuters) - Two potentially deep pockets of recovery for former customers of the collapsed cryptocurrency exchange FTX just got a lot shallower.

After FTX fell apart, its customers filed at least four class actions accusing either Silvergate Bank or Signature Bank of helping FTX insiders plunder customer funds. The allegations are just that: The FTX litigation is in very early stages and neither the U.S. Justice Department nor other U.S. regulators have accused Silvergate or Signature of involvement in FTX’s alleged fraud. (Reuters reported last month that Silvergate is under investigation by prosecutors.)

A Silvergate spokesperson declined to comment on FTX customers’ allegations. Signature did not respond to my query.

It’s easy to see why plaintiffs' lawyers for FTX customers targeted the banks. The exchange itself is in Chapter 11 bankruptcy, and FTX insiders are facing restitution claims in litigation brought by the U.S. government. And banks, as the saying goes, are where the money is: Victims of convicted fraudsters Bernard Madoff and Allen Stanford recovered billions of dollars in settlements with big banks that allegedly facilitated their Ponzi schemes.

That’s almost certainly not going to happen in the FTX case, thanks to the failures of both Silvergate and Signature.

On Wednesday, Silvergate’s parent, Silvergate Capital Corp, announced it was shutting down the bank and liquidating its assets. Then on Sunday, New York state banking regulators closed down Signature Bank to stem fallout from the failure of Silicon Valley Bank.

Those developments, according to plaintiffs' lawyers who have named the banks in a suit by FTX customers, will severely restrict the amount of money they can tap if they manage to establish that the banks bear responsibility.

“This certainly imposes another hurdle,” said Kerry Miller of Fishman Haygood, whose firm filed a sweeping FTX class action last month in Miami federal court against 18 defendants including Signature and Silvergate. Miller said FTX customers may be limited to going after money from insurance policies covering the banks’ top executives and board members.

“That’s a strong possibility,” agreed Timothy Blood of Blood Hurst & O'Reardon. Blood’s firm has brought a class action in San Francisco federal court against Silvergate and a case in Manhattan federal court against Signature. He said it is not even clear whether FTX customers’ claims against the failed banks can even proceed while the banks wind down their operations.

That's not the only uncertainty surrounding FTX customers' litigation to recover their lost funds. A special panel of federal judges, known as the U.S. Judicial Panel on Multidistrict Litigation, is considering a motion by famed litigator David Boies of Boies Schiller Flexner and co-counsel Adam Moskowitz to transfer more than a dozen FTX customer class actions to Miami federal court.

That’s where the Boies and Moskowitz firms are litigating claims that FTX celebrity endorsers — including retired NFL quarterback Tom Brady, model Gisele Bundchen and comedian Larry David — violated Florida securities laws by inducing customers to deposit money in FTX yield-bearing accounts.

But on Friday, many other plaintiffs' firms that have brought FTX customer class actions — including lawyers whose suits named Silvergate and Signature — filed briefs opposing a transfer of their cases to Miami.

Claims against FTX's banks for allegedly enabling fraud, they argued, are not related to suits accusing FTX's celebrity promoters of securities violations so there's no good reason to lump the class actions together.

One law firm that has brought a case against Silvergate, Girard Sharp, told the judicial panel that it favors consolidation with other class actions by FTX customers — but it called for all of the cases to be transferred to San Francisco, where several other FTX class actions were filed. Most of those cases – which assert a variety of theories against defendants including Silvergate, celebrity endorsers, FTX insiders and venture capital funds that allegedly lent credibility to FTX by disclosing their investments in the exchange — are being overseen by U.S. District Judge Jacqueline Scott Corley.

The venue for consolidated litigation can be a significant factor in determining which plaintiffs lawyers end up being appointed to lead cases. Leadership appointments, in turn, affect the fees that plaintiffs lawyers can earn from sprawling litigation.

The Boies and Moskowitz firms have already told the special panel that will decide whether to move all FTX litigation to a single judge that they are the best choice to lead the litigation. A transfer to Miami could give Boies and Moskowitz an edge in winning that appointment.

A different slate of plaintiffs firms, however, urged the panel not to move any of the California cases to Miami (or, alternatively, to transfer the Boies and Moskowitz cases to San Francisco). Their brief, filed on Friday, argued that lawyers in the California cases have already coordinated on a plan to conduct the litigation efficiently. Boies and Moskowitz, they said, are trying to “derail the organized progression” of their cases.

The California group did not respond to my query about the deepening rivalry with the Boies and Moskowitz firms. Moskowitz said in a email that he continues to believe the litigation should take place in Miami, where FTX investors will benefit from investor-friendly Florida securities laws. He also said that class actions against Silvergate will probably not be consolidated with other FTX customer suits in light of the bank’s voluntary liquidation.

It looks like it’s going to be a while before FTX customers know for sure where their claims will be litigated. The judicial panel is meeting at the end of March, but the FTX consolidation motion isn’t on their schedule.

Read more:

Column — Latest FTX lawsuit casts investors Sequoia, Thoma Bravo as co-conspirators

Boies, co-counsel move to grab control of all private FTX cases

Boies law firm makes odd moves in FTX case against Tom Brady, celebs