Silvergate Bank Sued for Inadequate Compliance Program

Silvergate Bank has been charged by the Securities and Exchange Commission (SEC) for misleading investors about the effectiveness of its Anti-Money Laundering (AML) compliance program.

The SEC charged three former executives including former Silvergate Bank CEO Alan Lane, former Chief Risk Officer Kathleen Fraher, and former Chief Financial Officer Antonio Martino. All parties charged, aside from Martino, have agreed to settle the SEC’s charges.

In the SEC’s complaint, from November 2022 to January 2023, Silvergate executives falsely assured investors that Silvergate had an effective compliance program and continuously monitored high-risk crypto customers, such as FTX which went bankrupt in 2022.

The statements were part of an effort to counter public speculation that FTX had used Silvergate accounts to facilitate its misconduct.

In March, it emerged that FTX users were suing the now-defunct Silvergate by claiming it abetted FTX and its affiliated trading firm Alameda Research to commit a historic fraud. On March 20, Judge Ruth Bermudez Montenegro of a San Diego federal court filed an order denying Silvergate’s motion to dismiss the case.

Silvergate Fails to Monitor $1 Trillion in Customer Transactions

However, the SEC alleges that Silvergate’s automated transaction monitoring system failed to monitor more than $1 trillion in customer transactions on the Silvergate Exchange Network.

“At all times, but especially during moments of crises, public companies and their officers must speak truthfully to the investing public. Here, we allege that Silvergate, Lane, and Fraher fell not only woefully, but also fraudulently, short in that regard,” said Gurbir Grewal, director of the SEC’s Division of Enforcement.

He emphasized that rather than disclosing serious deficiencies in its compliance programs following the collapse of FTX, Silvergate misled investors about the soundness of these programs.

Due to these deficiencies, Silvergate allegedly failed to detect nearly $9 billion in suspicious transfers among FTX and its related entities. This ultimately led to a significant drop in Silvergate’s stock, wiping out billions in market value for investors.

The SEC’s complaint also accuses Silvergate and Martino for misrepresenting the company’s financial condition during a liquidity crisis and bank run following FTX’s collapse.

It claims that Silvergate and Martino, in an earnings release and earnings call, understated the bank’s losses from expected securities sales and falsely asserted that it remained well-capitalized as of December 31, 2022.

In response to the SEC, Martino told Cryptonews in an emailed statement, “The allegations made by the SEC are unfounded and irresponsible, and I look forward to presenting my case in court and clearing my name.”

In March 2023, Silvergate announced it would wind down its banking operations, resulting in its stock plummeting to near zero.