The parent company of a cryptocurrency-friendly bank, Silvergate Capital Corporation, is being sued by the United States Securities and Exchange Commission (SEC) for allegedly aiding fraudulent activity at the now-defunct exchange FTX.
In a filing on July 1 in the U.S. District Court for the Southern District of New York, the SEC accused Silvergate, former CEO Alan Lane, and former Chief Risk Officer Kathleen Fraher of deceiving investors about the strength of its Bank Secrecy Act/Anti-Money Laundering compliance program and the “monitoring of crypto customers” like FTX.
The former Silvergate Chief Financial Officer Antonio Martino was also charged with “misleading investors about the company’s losses from expected securities sales following FTX’s collapse.” All parties, except Martino, have agreed to settle with the SEC.
Martino, through his attorneys at law firm Linklaters, stated, “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 significant losses for investors. He alleged that the firm and its executives “doubled down” on misleading investors following FTX’s collapse from November 2022 to January 2023.
The SEC reported that 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. The settlements will be subject to court approval. The SEC’s enforcement action came alongside a settlement between Silvergate and the Board of Governors of the Federal Reserve System and the California Department of Financial Protection and Innovation.
Furthermore, in March 2023, Silvergate voluntarily liquidated after several cryptocurrency firms announced their intention to cut ties to the bank due to alleged links to FTX. The collapse of FTX in November 2022 resulted in criminal charges against several executives, including former CEO Sam Bankman-Fried.
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.”
Additionally, the SEC action followed a judge’s approval of a class-action lawsuit filed by FTX users against Silvergate, alleging that the bank had been aware of fraudulent activity at the crypto exchange. The company has denied the allegations.
The SEC is also facing a tough legal battle in its enforcement of crypto-related cases, as two recent opinions from the U.S. Supreme Court could impact its approach to such cases. One opinion held that defendants in SEC civil cases concerning securities fraud are entitled to a jury trial.