SEC Targets Silvergate Capital Corporation

The United States Securities and Exchange Commission (SEC) has filed a lawsuit against Silvergate Capital Corporation, the parent company behind a crypto-friendly bank that allegedly helped facilitate fraud at the now-defunct exchange FTX.

In a July 1 filing in the U.S. District Court for the Southern District of New York, the SEC alleged that Silvergate, former CEO Alan Lane, and former Chief Risk Officer Kathleen Fraher misled investors regarding the strength of its Bank Secrecy Act/Anti-Money Laundering (BSA/AML) compliance program and the monitoring of crypto customers like FTX.

Allegations and Charges

The SEC I also charged former Silvergate Chief Financial Officer Antonio Martino with misleading investors about the company's losses from expected securities sales following FTX's collapse.

While all parties, except Martino, have agreed to settle with the SEC, Martino has stated his attorneys at law firm Linklaters, saying, "The allegations made by the SEC are unfounded and irresponsible, and I look forward to presenting my case in court and clearing my name."

According to SEC enforcement director Gurbir Grewal, Silvergate allegedly failed to detect nearly $9 billion in suspicious transfers among FTX and its related entities, leading to massive losses for investors. He claimed the firm and its executives "doubled down" on misleading investors following FTX's collapse from November 2022 to January 2023.

Financial Penalties and Settlements

The SEC said Silvergate had agreed to pay a $50 million civil penalty "without admitting or denying the allegations," while Lane and Fraher agreed to pay $1 million and $250,000, respectively. These settlements will be subject to court approval.

The commission's enforcement action occurred in parallel to a settlement between Silvergate, the Board of Governors of the Federal Reserve System, and the California Department of Financial Protection and Innovation.

Silvergate's Liquidation and FTX's Collapse

Silvergate voluntarily liquidated in March 2023 after several crypto firms announced they intended to cut ties with the bank, alleging links to FTX.

FTX collapsed and filed for bankruptcy in November 2022, resulting in criminal charges against several executives, including former CEO Sam Bankman-Fried, currently serving a 25-year sentence in federal prison.

The complaint stated that under Bankman-Fried, FTX had directed customers to wire money to Alameda's account with Silvergate in exchange for assets on the crypto exchange. The former CEO also provided a testimonial for the crypto-friendly bank's website, claiming it "revolutionized banking for blockchain companies."

Class-Action Lawsuit and Supreme Court Opinions

The SEC action follows a judge signing off on a class-action lawsuit filed by FTX users against Silvergate. The lawsuit alleges that the bank was aware of fraudulent activity at the crypto exchange. The company has denied these allegations.

On June 27 and 28, the U.S. Supreme Court released two opinions that could affect how the SEC handles crypto enforcement cases. One opinion held that SEC civil cases concerning securities fraud defendants are entitled to a jury trial.

"The allegations made by the SEC are unfounded and irresponsible, and I look forward to presenting my case in court and clearing my name," said Martino.