Silvergate Bank, a crypto-friendly institution that shut down in March 2023, was sued by the U.S. Securities and Exchange Commission (SEC) on Monday, with the agency alleging in a filing that the firm's leadership had misled the public and failed to properly monitor an estimated $1 trillion worth of transactions.
Among those were some $9 billion worth of transactions from once-prominent cryptocurrency exchange FTX, which collapsed in November 2022 following an array of fraudulent actions from co-founder and CEO Sam Bankman-Fried and his allies.
In addition to suing Silvergate Capital Corporation, the SEC also included former CEO Alan Lane, COO Kathleen Fraher, and CFO Antonio Martino. Each is accused of securities violations.
Silvergate agreed to pay a $50 million civil penalty to settle the lawsuit, without agreeing to or denying the regulator’s accusations. The same can be said for Lane and Fraher, who paid $1 million and $250,000 in fines, respectively. But not Martino, who is accused of engaging “in a fraudulent scheme to mislead investors about the Bank’s dire financial condition.”
Silvergate, Lane, and Fraher made misrepresentations about the bank’s compliance programs, partly to assuage FTX-related concerns, according to the SEC. The regulator accused the bank and its executives of trying to cover up FTX’s use of Silvergate accounts for committed misconduct.
Silvergate’s failure came last year alongside that of several other banks, including the crypto-friendly Signature Bank and Silicon Valley Bank (SVB), which represented the third-largest bank failure in history when the government stepped in to guarantee SVB’s deposits.
Once focussed primarily on real estate lending, Silvergate emerged as a go-to banker of crypto firms after launching the Silvergate Exchange Network in 2017. The round-the-clock service enabled Silvergate’s institutional clients to settle large transactions with each other.
Silvergate said it would begin winding down operations last March, citing regulatory headwinds and the bear market as insurmountable forces. That entailed a voluntary liquidation. Still, the bank’s failure was highlighted by Rep. Elizabeth Warren (D-MA) as evidence of crypto’s risks.
“Rather than coming clean to investors about serious deficiencies in its compliance programs in the wake of the collapse of FTX [...] they doubled down in a way that misled investors,” the SEC’s Director of the Division of Enforcement, Gurbir Grewal, said in a statement.
Silvergate and its then-CFO Martino allegedly misrepresented losses on securities it sold to stay afloat after FTX’s collapse. Back then, it disclosed the sale of $5.2 billion in debt securities, alongside $4.3 billion in funds from a loan from the Federal Home Loan Bank (FHLB).
Less than a week after FTX’s collapse, Silvergate’s staff allegedly completed an analysis of over 300 suspicious transactions as well, some of which took place over SEN. Silvergate’s staff was able to link those transactions to FTX’s custodial accounts, which contained customer funds.
Bankman-Fried was sentenced to 25 years in prison months ago, after a Manhattan jury found him guilty of a sweeping fraud scheme. The one-time wunderkind lied to FTX’s investors and lenders, while siphoning billions in customer funds to spend to his own benefit.
After becoming aware of the bank’s analysis, Lane made allegedly false and misleading statements during an interview on CNBC, while speaking about Silvergate’s compliance programs.
“We built this business compliance-first,” he said of Silvergate. “We satisfy all the regulatory requirements.”
Edited by Andrew Hayward
Editor's note: This story was updated after publication with additional details.