SEC Sues Silvergate Capital Corp for Securities Fraud Over $9 Billion in Suspicious Transfers

The U.S. Securities and Exchange Commission (SEC) has sued crypto-focused bank Silvergate Capital Corp in a federal court for securities fraud, according to a court filing on Monday. The SEC claims the bank failed to detect nearly $9 billion in suspicious transfers by FTX and related entities.

The SEC alleged that Silvergate engaged in a “fraudulent scheme” to mislead investors about its bank secrecy and anti-money laundering compliance programs, as well as its “dire financial condition” following the collapse of crypto exchange FTX in November 2022. “The bank also failed to detect nearly $9 billion in suspicious transfers by FTX and its related entities,” the SEC stated.

The now-defunct California-based lender has agreed to pay $63 million to settle civil charges brought by federal and state regulators. Former CEO Alan Lane and former Chief Risk Officer Kathleen Fraher, accused of misrepresenting the bank’s operational and legal risks, settled with the SEC without admitting or denying the allegations. They agreed to pay civil penalties of $1 million and $250,000 respectively and accepted a five-year ban on serving as officers or directors of public companies. However, Antonio Martino, Silvergate’s former Chief Financial Officer, denied similar allegations and plans to fight the charges in court.

Jim Richards, the founder of AML consulting firm RegTech, criticized the SEC’s decision to allow Mr. Lane and Ms. Fraher to settle without admitting liability. “I hate these ‘neither admit nor deny’ settlements,” he said. “I won’t admit that I did it, and I won’t deny that I did it, but I’ll pay a fine regardless. Only in SEC world does this pass the smell test.”

The settlement addresses accusations related to the bank’s collapse following the downfall of cryptocurrency exchange FTX. The $63 million settlement includes penalties assessed by the SEC, the Federal Reserve, and the California Department of Financial Protection and Innovation (DFPI).

The SEC’s lawsuit alleges that Silvergate and three of its former executives misled investors about the bank’s compliance with the Bank Secrecy Act and anti-money laundering (BSA/AML) regulations. According to the SEC, Silvergate failed to monitor approximately $1 trillion in transactions on its Silvergate Exchange Network, a platform facilitating real-time transfers between crypto investors and exchanges like FTX. Additionally, the bank did not detect nearly $9 billion in suspicious transfers by FTX and its related entities. These failures were central to the SEC’s charges that Silvergate and its executives deceived investors about the strength of the bank’s compliance programs and its financial health.

Silvergate paid $20 million to the DFPI and $43 million to the Federal Reserve, with a $50 million fine from the SEC expected to be offset by these payments. This settlement marks a significant step in Silvergate’s efforts to wind down its operations, which began in March 2023 after the collapse of FTX led to the withdrawal of $8 billion in deposits by customers.

Gurbir Grewal, the director of the SEC’s enforcement division, commented, “At all times, but especially during moments of crises, public companies and their officers must speak truthfully to the investing public. We allege that Silvergate, Lane, and Fraher fell not only woefully, but also fraudulently, short in that regard. Rather than coming clean to investors about serious deficiencies in its compliance programs in the wake of the collapse of FTX, one of Silvergate’s largest banking customers, they doubled down in a way that misled investors about the soundness of the programs.”

The SEC also alleges that Silvergate and Mr. Martino “misrepresented the company’s bleak financial condition during a liquidity crisis and bank run following FTX’s collapse.” All parties charged, aside from Mr. Martino, have agreed to settle the SEC’s charges. The litigation against Mr. Martino will now go to court. Through a statement from his attorneys, Mr. Martino denied the allegations. “The allegations made by the SEC are unfounded and irresponsible, and I look forward to presenting my case in court and clearing my name,” he said in a statement to the Financial Times.

Founded in 1998, Silvergate was previously a small real estate lender but expanded rapidly when it moved into cryptocurrency in 2013. The firm was one of the most important lenders related to FTX. The company announced it was shutting down in March 2023, citing “industry and regulatory developments.”

In a statement, Silvergate said, “In early March 2023, Silvergate made a responsible decision to liquidate voluntarily and without government assistance. As of November 2023, all deposits had been repaid to banking customers and Silvergate ceased banking operations soon after. The settlements announced, which will facilitate the surrender of Silvergate’s bank charter, are part of the bank’s continued orderly wind down and successfully conclude investigations by the Federal Reserve, DFPI, and SEC.”

Sarah Beth Felix, the founder of Palmera Consulting, noted that the SEC’s allegations “did not give specifics of AML-related failures, but we know there were major issues due to their involvement with FTX.” She added, “This penalty is directly related to AML monitoring failures. There are no details to operationalize really – but I think the one main takeaway is they did not monitor and report suspicious activity that occurred from 2014 to 2023 related to their internal payments transfer system, SEN.”

By fLEXI tEAM