The United States Securities and Exchange Commission (SEC) has taken legal action against Silvergate Capital Corporation, the parent company behind a crypto-friendly bank accused of facilitating fraud at the now-defunct exchange FTX.
Allegations of Misleading Investors
In a filing dated July 1 in the U.S. District Court for the Southern District of New York, the SEC alleged that Silvergate, its former CEO Alan Lane, and former Chief Risk Officer Kathleen Fraher, misled investors regarding the robustness of its Bank Secrecy Act/Anti-Money Laundering (BSA/AML) compliance program. The complaint also highlighted the inadequacies in monitoring crypto customers like FTX. Additionally, former Silvergate Chief Financial Officer Antonio Martino was charged with misleading investors about the company’s losses from expected securities sales following FTX’s collapse. While Martino has vowed to contest the charges, the other parties have agreed to settle with the SEC.
Martino, in a statement provided to Cointelegraph by his attorneys at Linklaters, said, “The allegations made by the SEC are unfounded and irresponsible, and I look forward to presenting my case in court and clearing my name.”
SEC enforcement director Gurbir Grewal stated that Silvergate allegedly “failed to detect nearly $9 billion in suspicious transfers among FTX and its related entities,” which resulted in significant investor losses. Grewal further accused the firm and its executives of doubling down on misleading investors from November 2022 to January 2023, following FTX’s collapse.
Silvergate has agreed to pay a $50 million civil penalty “without admitting or denying the allegations,” while Lane and Fraher will pay $1 million and $250,000, respectively. These settlements are subject to court approval. Parallel to the SEC’s enforcement action, Silvergate also reached a settlement with the Board of Governors of the Federal Reserve System and the California Department of Financial Protection and Innovation.
Voluntary Liquidation and Ties to FTX
Silvergate voluntarily liquidated in March 2023 after several crypto firms announced their intent to sever ties with the bank due to its connections with FTX. The crypto exchange FTX collapsed and filed for bankruptcy in November 2022, leading to criminal charges against several executives, including former CEO Sam Bankman-Fried, who is currently serving a 25-year sentence in federal prison.
The SEC’s complaint noted that under Bankman-Fried’s direction, FTX had instructed customers to wire money to Alameda’s account with Silvergate in exchange for assets on the crypto exchange. Bankman-Fried had even provided a testimonial for Silvergate’s website, praising the bank for “revolutionizing banking for blockchain companies.”
Class-Action Lawsuit and Regulatory Repercussions
The SEC’s action follows a judge’s approval of a class-action lawsuit filed by FTX users against Silvergate, alleging the bank’s awareness of fraudulent activities at the crypto exchange. Silvergate has denied these allegations.
Moreover, the legal landscape for the SEC’s handling of crypto enforcement cases could change significantly following recent U.S. Supreme Court decisions. On June 27 and 28, the court released two opinions affecting the SEC’s authority. One ruling established that defendants in SEC civil cases concerning securities fraud are entitled to a jury trial.
| Entity/Individual | Allegations | Penalty/Fine | Settlement Status |
|---|---|---|---|
| Silvergate Capital Corp | Misleading investors about BSA/AML compliance | $50 million civil penalty | Agreed, subject to court approval |
| Alan Lane (former CEO) | Misleading investors | $1 million | Agreed, subject to court approval |
| Kathleen Fraher (former CRO) | Misleading investors | $250,000 | Agreed, subject to court approval |
| Antonio Martino (former CFO) | Misleading investors about company losses | N/A | Contesting charges |
The SEC’s lawsuit against Silvergate underscores the regulatory body’s ongoing scrutiny of crypto-friendly financial institutions. As the crypto industry continues to evolve, regulatory enforcement actions like these highlight the importance of robust compliance programs and transparent operations.
The SEC’s lawsuit against Silvergate and the subsequent settlements mark a significant development in the ongoing regulation of the cryptocurrency industry. As the sector grapples with these legal challenges, the outcomes of these cases will likely shape the future regulatory landscape for crypto-friendly financial institutions.
