The U.S. Securities and Exchange Commission (SEC) has taken legal action against Silvergate Capital Corporation, the parent company of the crypto-friendly Silvergate Bank. This lawsuit alleges that Silvergate, along with its former CEO Alan Lane and former Chief Risk Officer Kathleen Fraher, misled investors about its compliance with the Bank Secrecy Act/Anti-Money Laundering (BSA/AML) protocols and the monitoring of clients such as FTX.
In a filing dated July 1, the SEC detailed accusations against Silvergate, asserting that the bank failed to detect $9 billion in suspicious transfers involving FTX and its related entities. Gurbir Grewal, the SEC’s enforcement director, emphasized that Silvergate’s oversight failures led to significant investor losses. He also claimed that the bank and its executives continued to mislead investors even after the collapse of FTX. As a result of these actions, the SEC has levied a $50 million civil penalty against Silvergate. Notably, the bank has agreed to this settlement without admitting or denying the allegations. Additionally, Alan Lane has agreed to pay a $1 million fine, and Kathleen Fraher will pay $250,000, both of which are pending court approval.
Following FTX’s bankruptcy in November 2022, Silvergate decided to enter voluntary liquidation in March 2023. This decision came after key clients, including Coinbase and Gemini, severed ties with the bank due to its associations with FTX. The fallout was further compounded by a letter from U.S. senators Elizabeth Warren, Roger Marshall, and John Kennedy, alleging that FTX directed customers to wire funds to Alameda Research’s account at Silvergate in exchange for assets on FTX. Sam Bankman-Fried, the former CEO of FTX, acknowledged that FTX did not have an account with Silvergate and admitted that funds were improperly transferred to Alameda’s accounts. Bankman-Fried is currently serving a 25-year federal prison sentence for his role in the FTX collapse.
In addition to the penalties against Lane and Fraher, the SEC has charged Silvergate’s Chief Financial Officer, Antonio Martino, with misleading investors about the firm’s losses from expected securities sales following FTX’s downfall. Martino faces accusations of violating federal securities laws, including antifraud and books-and-records provisions. He is also charged with aiding Silvergate in its violations. Unlike Lane and Fraher, Martino has not settled with the SEC and maintains that the allegations are baseless. His legal team has indicated that he intends to fight the charges in court.
The SEC’s charges against Silvergate highlight the critical importance of robust compliance programs in the cryptocurrency industry. As regulatory scrutiny intensifies, firms must ensure transparency and adherence to legal standards to maintain investor trust and avoid severe penalties. Silvergate’s case serves as a stark reminder of the consequences of failing to meet these obligations.
