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Crypto bank fined for alleged control failures
At the same time, the U.S. Securities and Exchange Commission (SEC) indicted Silvergate Capital and two executives, former CEO Alan Lane and former chief risk officer Kathleen Fraher, for allegedly misleading investors and violating reporting, internal control, and bookkeeping requirements.
Specifically, the SEC alleged that Silvergate, which shifted its business to serve the emerging cryptocurrency sector starting in 2014, and its executives misled investors when they sought to refute speculation that the failed cryptocurrency platform FTX had used its accounts at Silvergate to facilitate its improper conduct.
The regulator said it had “misrepresented the operational and legal risks to which the bank was exposed by falsely stating in SEC filings and other public statements” that it had effective anti-money laundering controls, tailored to the additional risks posed by its cryptocurrency clients, “including one of its most notable clients, FTX.”
The SEC alleged that the bank’s controls were inadequate and that its automated systems failed to adequately monitor suspicious activity in approximately $1 trillion of transactions on its payment platform. The regulator also alleged that the bank failed to detect nearly $9 billion in suspicious transfers from FTX.
“At all times, but especially in times of crisis, public companies and their executives must speak truthfully to the investing public. Here, we argue that Silvergate, Lane, and Fraher have not only dismally but fraudulently failed to do so,” Gurbir Grewal, director of the SEC’s enforcement division, said in a statement.
“Rather than confess to investors the serious deficiencies in its compliance programs following the collapse of FTX, one of Silvergate’s largest banking clients, they doubled down in a way that misled investors about the strength of the programs. … Silvergate’s stock ultimately collapsed, wiping out billions in market value for investors,” he added.
Without admitting or denying the SEC’s allegations, Silvergate accepted a final judgment ordering the payment of a $50 million civil penalty (which could be offset by the $63 million penalty imposed by the Fed and the California DFPI) and imposing a permanent injunction to resolve the allegations.
Lane and Fraher both settled the charges without admitting or denying the allegations, agreeing to permanent injunctions, five-year officer and director bans, and civil penalties of $1 million and $250,000, respectively. All settlements are subject to court approval.
The SEC also accused Silvergate and its former CFO, Antonio Martino, of allegedly misleading investors about the company’s financial health after the collapse of FTX, which triggered a liquidity crisis at the bank.
The regulator also said Silvergate and Martino “understated Silvergate’s losses from anticipated stock sales and misrepresented that it remained well capitalized” in a press release and earnings conference call. The allegations against Martino were not proven in court.
Last year, Silvergate announced that it would voluntarily cease operations.
The Fed said the bank had repaid all of its customers’ deposits.