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Executives of failed crypto bank Silvergate hit by SEC charges
In addition to the sanctions against former Silvergate executives, the Federal Reserve Board and the California Department of Financial Protection and Innovation announced $63 million in fines against the defunct bank for internal oversight deficiencies.
Ariana Drehsler/Bloomberg
The Securities and Exchange Commission on Monday announced a settlement with the former CEO and chief risk officer of the now-defunct Silvergate Capital Corp., while also filing civil charges against the cryptocurrency-friendly bank’s former chief financial officer.
Former CEO Alan J. Lane and former Chief Risk Officer Kathleen Fraher have settled allegations that they misled investors about the strength of the bank’s anti-money laundering compliance program and its monitoring of crypto clients. Those clients included FTX, the crypto exchange whose spectacular collapse led to the demise of Silvergate five months later.
The SEC has accused Antonio Martino, former CFO of Silvergate, of misleading investors about losses the La Jolla, Calif.-based bank suffered following the November 2022 collapse of FTX. Martino has denied the allegations and vowed to defend himself in court.
The SEC’s actions on Monday were part of a coordinated series of moves by federal and state regulators. At the same time, the Federal Reserve Board and the California Department of Financial Protection and Innovation announced $63 million in fines against Silvergate for internal oversight deficiencies.
The SEC said Silvergate failed to adequately monitor its core product, known as the Silvergate Exchange Network, in 2021 and 2022, the key mechanism for the bank’s cryptocurrency customers to transfer funds between each other. The bank’s system failed to monitor approximately $1 trillion in suspicious banking transactions related to its cryptocurrency exchange, according to the SEC.
“The bank failed to detect nearly $9 billion in suspicious transfers by FTX and its related entities,” the SEC said in a complaint filed Monday in U.S. District Court for the Southern District of New York.
Lane and Fraher misrepresented the operational and legal risks to which Silvergate Bank was exposed, falsely stating in SEC filings and other public statements that the bank had an effective Bank Secrecy Act/anti-money laundering compliance program tailored to the increased risks posed by its cryptocurrency customers, the SEC said.
Lane and Fraher reached settlements with the SEC without admitting or denying the agency’s allegations. Lane agreed to pay a $1 million civil penalty, while Fraher agreed to pay a $250,000 civil penalty, according to the SEC. Both former Silvergate executives also agreed to permanent injunctions and five-year employment bans on their officers and directors, the SEC said in a press release.
Haima Marlier, an attorney with Morrison and Foerster who represents Fraher, declined to comment. A lawyer for Lane did not immediately return a call seeking comment.
After the FTX bankruptcy sparked panic in the cryptocurrency industry, leading to a run on Silvergate’s banks and a severe liquidity crisis, the SEC alleged that Martino was involved in a fraudulent scheme to deceive investors and regulators about the bank’s financial condition.
Needing liquidity, the bank sold a large chunk of its bond portfolio in the fourth quarter of 2022. But the value of its bond investments plummeted as interest rates rose, so Silvergate was forced to take a hit on the sale.
The lawsuit alleges that Martino and other bank executives knew it would have to shed more bad debts, further eroding its capital cushion. By underestimating the amount of debt it needed to shed, the bank was able to mask the financial hit it would soon suffer, prosecutors said.
Martino “either knew or recklessly ignored that the bank would have to sell substantially more” in securities than he told investors, prosecutors said. Instead of the $200 million in additional securities sales that Martino “falsely implied” were necessary, the bank ended up selling about $1 billion, the lawsuit said.
Adam Lurie, the attorney representing Martino, said his client denies the allegations.
“Mr. Martino acted reasonably and in good faith throughout his time at Silvergate,” said Lurie, a partner at the law firm Linklaters. “He denies any wrongdoing and intends to challenge the SEC’s allegations in court. The SEC is inappropriately seeking, with the benefit of hindsight, to substitute its business judgment for decisions that Mr. Martino, a career finance professional, made in real time.”
Silverage announced on March 8, 2023, that it would liquidate and cease operations. The bank faced potential enforcement action from banking regulators, high costs to remedy its BSA/AML program, and an auditor’s request to correct its financial statements regarding losses from the anticipated securities sales, the SEC said.
On May 23, 2023, the Fed and the California DFPI issued a joint cease and desist order against the bank to facilitate its voluntary liquidation.
Polo Rocha and Kevin Wack contributed to this report.