The United States Securities and Exchange Commission (SEC) has sued Silvergate Capital Corporation, the parent company of a crypto-friendly bank accused of aiding fraud at 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 about the strength of their Bank Secrecy Act/Anti-Money Laundering compliance program and the oversight of crypto customers like FTX.
Former Silvergate Chief Financial Officer Antonio Martino was also charged with misleading investors regarding losses from expected securities sales following FTX’s collapse. All defendants except Martino have agreed to settle with the SEC.
Martino responded, “The allegations by the SEC are unfounded and irresponsible. I look forward to clearing my name in court,” according to a statement provided by his attorneys at law firm Linklaters.
SEC enforcement director Gurbir Grewal claimed Silvergate failed to detect nearly $9 billion in suspicious transfers involving FTX and its entities, resulting in significant investor losses. Grewal accused the firm and its executives of intensifying misleading practices after FTX’s collapse from November 2022 to January 2023.
Silvergate Capital Corporation has agreed to pay a $50 million civil penalty to settle allegations by the SEC, “without admitting or denying” the charges. Former CEO Alan Lane agreed to pay $1 million, and former Chief Risk Officer Kathleen Fraher agreed to pay $250,000 in separate settlements.
These agreements are pending court approval. The SEC’s enforcement action coincided with settlements between Silvergate and the Federal Reserve Board and the California Department of Financial Protection and Innovation.
In March 2023, Silvergate voluntarily liquidated following announcements from several crypto firms intending to sever ties due to alleged connections with FTX. FTX, which collapsed and filed for bankruptcy in November 2022, resulted in criminal charges against executives, including former CEO Sam Bankman-Fried, currently serving a 25-year federal prison sentence.
According to the complaint, under Bankman-Fried’s leadership, FTX directed customers to wire funds to Alameda’s account at Silvergate in exchange for assets on the exchange. Bankman-Fried also provided a testimonial for Silvergate, praising its role in revolutionizing banking for blockchain companies.
The SEC’s action followed a judge’s approval of a class-action lawsuit by FTX users against Silvergate, alleging the bank was aware of fraudulent activity at the exchange, which Silvergate denies.
On June 27 and 28, the U.S. Supreme Court issued opinions potentially impacting SEC crypto enforcement cases, including one granting defendants in SEC civil cases involving securities fraud the right to a jury trial.
