Law EnforcementJuly 9, 2024

Silvergate Capital Settles Charges of Failing to Monitor $1T in Transactions

The firm allegedly misled investors about its compliance and oversight of transactions, including those made by defunct cryptocurrency exchange FTX.

Reported by Michael Katz

Silvergate Capital Corp., its former CEO and its chief risk officer have agreed to pay regulators a total of $63 million to settle charges they misled investors about the effectiveness of the Bank Secrecy Act and anti-money-laundering compliance program at its Silvergate Bank subsidiary, as well as its monitoring of cryptocurrency customers, which included the now-bankrupt FTX Trading Ltd.

The firm and the executives, which include former CEO Alan Lane and former Chief Risk Officer Kathleen Fraher, will pay the penalty as part of a settlement with the SEC, the California Department of Financial Protection and Innovation and the Federal Reserve Board. The SEC also charged former Chief Financial Officer Antonio Martino with violating certain anti-fraud and books-and-records provisions of federal securities laws, as well as with aiding and abetting Silvergate’s violations. Martino has not agreed to settle the regulator’s charges, according to the SEC.

Martino, who was named CFO of healthcare fintech company PayZen in March, could not immediately be reached for comment.

The settlement consists of a $20 million payment to the California DFPI and a $43 million payment to the Federal Reserve Board. Penalties of $50 million assessed by the SEC will be offset by Silvergate’s payments to the DFPI and the Federal Reserve Board.

According to the SEC’s complaint, Silvergate, Lane and Fraher allegedly misled investors by stating that Silvergate had effective compliance programs and conducted ongoing monitoring of its high-risk crypto customers, including FTX, which imploded in late 2022.

The regulator noted that Lane issued a letter that was sent to bank examiners and included in an SEC filing that refuted public criticism of Silvergate’s compliance program. According to the SEC, this was intended “to assure investors that Silvergate was regulatorily compliant, and to tout its supposedly significant due diligence on FTX and FTX’s related entities.”

According to the SEC complaint, the letter was false or misleading because of the “critical deficiencies” in Silvergate’s compliance program, about which the SEC charged Lane and Fraher knew or should have known at the time. It also accused the bank of failing to detect nearly $9 billion in “suspicious transfers” made by FTX and its related entities.

The regulators also alleged Silvergate and Martino misrepresented the company’s “dire financial condition” during a liquidity crisis and bank run following FTX’s collapse. The complaint alleged that in an earnings release and earnings call, Silvergate and Martino intentionally understated the firm’s losses from expected security sales and falsely claimed that it remained well-capitalized.

“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,” said Gurbir Grewal, director of the SEC’s Division of Enforcement, in a statement. “Silvergate’s stock eventually cratered, wiping out billions in market value for investors.”

Silvergate’s holding company announced in March 2023 that it would voluntarily liquidate Silvergate Bank.

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