SEC accuses Silvergate of misleading the public after FTX collapse

The Securities and Exchange Commission has filed a lawsuit against Silvergate Bank. 

The regulator accused Silvergate, which officially closed and liquidated last year, of misleading clients and investors about the effectiveness of its compliance programs, including its anti-money laundering efforts.

The suit names former CEO Alan Lane, former Chief Risk Officer Kathleen Freher and former Chief Financial Officer Antonio Martino as defendants, in addition to the bank itself. 

“SCC, Lane, and Fraher misrepresented the operational and legal risks facing the Bank by falsely stating in SEC filings and other public statements that the Bank had an effective BSA/AML compliance program tailored to the heightened risks posed by its crypto asset customers,” the SEC said in court documents. 

Read more: US Congressional research finds perception of crypto risk spurred bank withdrawals

The bank, the SEC continued, claimed to have “conducted extensive due diligence and transaction monitoring related to those customers, including one of its now most notorious customers, FTX (the crypto asset trading platform that imploded in November 2022 ) and FTX’s related entities.” But the program was “inadequate.”

The Silvergate staff were able to trace $9 billion worth of transfers from FTX-related entities in the review that happened less than a week after the collapse.

“​​Most troubling to the BSA staff was the trend of funds that flowed from FTX’s custodial accounts — which held FTX customer funds — to a series of non-custodial FTX-related entities’ accounts, followed by transfers of these funds to other third parties — either through the SEN or to accounts external to the Bank,” lawyers for the SEC wrote.

Following the review, Lane allegedly made a false or misleading statement in a letter posted to his LinkedIn and Twitter accounts, claiming that the bank took the BSA “very seriously” but the SEC said it never did its due diligence on FTX.

Lane was also accused of providing “false or misleading” information to Congress when asked about the relationship between the bank and FTX. 

“Had Lane’s Response to the Congressional Letter accurately depicted the facts at the time, it would have contradicted prior public statements by Silvergate, and investors would have learned of the deficiencies in the Bank’s BSA program and could have appreciated the risks of investing in SCC stock,” the SEC said.

Per the filing, Martino allegedly sent a “deceptive” letter to the San Francisco Fed claiming that Silvergate was “well-capitalized” as of Jan. 19, 2023. The bank would go on to fail just a few months later in March.

The former executives and the bank are accused of violating the Securities Act and Exchange Act. 

The SEC’s suit seeks to prevent Lane, Fraher and Martino from “serving as an officer or director of any company that has a class of securities registered under” certain parts of the Exchange Act. 

In a press release following the suit, the SEC said that Silvergate settled with the regulator. As part of the deal, the defunct bank would pay $50 million. Both Lane and Fraher also opted to settle. Both face “permanent injunctions, five-year officer-and-director bars, and civil penalties of $1 million and $250,000 respectively” pending court approval.

Martino didn’t settle with the SEC, however.

“I am deeply committed to the highest standards of integrity and transparency in financial reporting, as has been the case over the course of my 30+ year career,” Martino said in a statement to Blockworks. “The allegations made by the SEC are unfounded and irresponsible, and I look forward to presenting my case in court and clearing my name.”

Updated July 1, 2024 at 4:40 pm ET: Added statements from SEC press release.

Updated July 1, 2024 at 4:29 pm ET: Added comment from former Silvergate CFO.

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