News
SEC Says Silvergate Bank Failed to Adequately Monitor $1 Trillion in Cryptocurrency Transactions
Silvergate Bank, once a cornerstone of the world of cryptofinance up to its collapse in early 2023defrauded its investors by lying about its anti-money laundering controls and misleading investors about how the fallout from FTX’s collapse would affect it, the Securities and Exchange Commission says in a lawsuit. The company’s chief executive officer, chief risk officer and chief financial officer are also named in the lawsuit.
Silvergate agreed to pay $50 million to settle the charges, without admitting or denying the allegations, the SEC said in a statement. CEO Alan Lane and CRO Kathleen Fraher also reached settlements of $1 million and $250,000 each.
Silvergate claimed to have an effective anti-money laundering (AML) program specifically designed for cryptocurrencies, but in reality it failed to adequately monitor “approximately $1 trillion” in transactions, the complaint states. Silvergate also failed to observe “approximately $9 billion in suspicious transfers” from FTX entities.
FTX Was Among Silvergate’s Largest Clients, SEC Says. Days Later Cryptocurrency exchange files for bankruptcyTHE bank run that would eventually kill Silvergate had begun. Lane, aware of the social media chatter about Silvergate, asked the bank to review its relationship with FTX. That review found more than 300 suspicious transactions in 2022. Those suspicious transfers totaled nearly $9 billion, the SEC complaint states.
At that point, Silvergate’s CFO, Antonio Martino, “executed a fraudulent scheme to mislead investors about the bank’s dire financial condition,” the SEC alleges. Martino knew the bank had borrowed billions, which it was supposed to repay in January and February 2023. The only way that could have happened was by selling securities, but Martino approved an earnings release that “falsely stated that the bank expected to sell only $1.7 billion in securities during the first quarter of 2023, of which it had already sold $1.5 billion.”
The SEC’s complaint alleges that the earnings call understated Silvergate’s losses from its stock sales. Martino also lied on the bank’s quarterly earnings call, according to the complaint.
Martino “categorically denies” the allegations, his lawyer, Adam Lurie, said in a statement emailed to The Verge by Rachel Katz, a spokeswoman for Martino’s law firm, Linklaters. “Mr. Martino acted reasonably and in good faith throughout his time at Silvergate. He denies any wrongdoing and intends to challenge the SEC’s allegations in court,” said Lurie, who was also directly quoted in a statement Katz said was his.
At the center of the SEC’s allegations is a network operated by Silvergate to allow cryptocurrency customers to make transactions at any time, called SEN. It has been used by stablecoin issuers Circle, Paxos, and Gemini, among others. While Silvergate claimed SEN was secure, the SEC says the network was not automatically monitored for suspicious transactions for “at least 15 months prior to November 2022.”
Additionally, on several occasions in 2022, the bank’s government examiners made clear to senior management that Silvergate’s program for complying with the Bank Secrecy Act was inadequate.
The company’s first-quarter 2023 earnings call wasn’t the only one to contain allegations of fraud. In November 2022, the company told investors it had a “state-of-the-art” compliance program. In fact, the SEC says there was no automated monitoring for several months before that earnings call was released.
Update, July 1st: Added Linklater’s statement, SEC press release and deal details.