Crypto-friendly bank Silvergate accused of fraud by SEC: Allegedly aware of unusual $9 billion flow from FTX

The U.S. Securities and Exchange Commission (SEC) yesterday issued a press release accusing the crypto-friendly bank Silvergate and its former CEO and former Chief Risk Officer of negligence in monitoring suspicious transactions totaling nearly $9 billion between the now-defunct exchange FTX and its related entities, directly facilitating and participating in fraudulent activities at the exchange.

Federal Reserve inspectors claim that the cryptocurrency business was the main reason for the collapse of Silvergate Bank

SEC Previously Filed Lawsuit Against Silvergate

Documents submitted to the Southern District of New York court yesterday, as seen here, revealed that the SEC accused Silvergate, its former CEO Alan Lane, and former Chief Risk Officer Kathleen Fraher of failing to adequately monitor records of customer fund transfers, including those of FTX, violating the Bank Secrecy Act and the BSA/AML compliance program.

The SEC stated that both individuals even made false statements to investors regarding the matter, leading to deception:

From November 2022 to January 2023, Silvergate, Lane, and Fraher misled investors by claiming that the bank had an effective BSA/AML compliance program and had conducted ongoing monitoring of high-risk cryptocurrency clients, including FTX, to some extent.

Additionally, "In fact, Silvergate's automated trading monitoring system failed to monitor over $9 billion in transactions on its in-house bank payment platform, the Silvergate Exchange Network SEN."

Furthermore, former Silvergate CFO Antonio Martino was accused of intentionally distorting and downplaying the company's financial crisis following FTX's collapse:

Martino understated expected losses from securities sales in the company's financial reports and meetings, misleading investors to believe that Silvergate's capital was still adequate.

SEC Enforcement Director: Deliberate Ignoring of FTX's Abnormal Fund Flows

In response, SEC Enforcement Director Gurbir Grewal strongly condemned the actions, emphasizing that public companies and their executives must be honest with investors and the public during times of crisis:

They failed to disclose the serious deficiencies in their compliance programs to investors, especially after FTX, one of Silvergate's largest bank clients, collapsed. Instead, they doubled down on misleading investors about the adequacy of these programs.

He added, "In fact, due to these deceptions, Silvergate failed to detect concerns with FTX, causing the company's stock to plummet, wiping out billions of dollars for investors."

Silvergate Settles with SEC, No Admission or Denial of Allegations

Currently, Silvergate, Lane, and Fraher have reached settlements with the SEC, agreeing to pay civil fines of $50 million, $1 million, and $250,000, respectively, without admitting or denying the allegations.

Only Martino has refused to settle with the SEC, and through his law firm Linklaters, clarified:

The SEC's allegations are unfounded and irresponsible, and I look forward to presenting my case in court to clear my name.

The settlement agreements are still pending court approval, while litigation and settlements with the Federal Reserve and the California Department of Financial Protection and Innovation regarding Silvergate are ongoing.

The Fall of Silvergate

At the end of 2022, FTX filed for bankruptcy, with several executives facing fraud charges, leading to deposit runs by Silvergate customers.

By March of last year, the U.S. saw the downfall of three banks within a month, with Silvergate being one of them, albeit voluntarily filing for liquidation.

Federal Reserve Orders Silvergate to Liquidate on a Deadline! A Retrospective of Crypto-Friendly Bank Silvergate's Life

A few months ago, a federal judge in San Diego approved a class-action lawsuit brought by FTX users against Silvergate, stating that they were aware of FTX's fraudulent activities but profited unfairly and unlawfully at the expense of FTX users.