The Securities and Exchange Commission announced settlements Monday with the former CEO and chief risk officer of the now-defunct Silvergate Capital Corp., while also filing civil charges against the crypto-friendly bank's onetime chief financial officer.
Former CEO Alan J. Lane and former Chief Risk Officer Kathleen Fraher settled allegations that they misled investors about the strength of the bank's anti-money laundering compliance program and its monitoring of crypto customers. Those customers included FTX, the crypto exchange whose spectacular collapse led to Silvergate's own demise five months later.
The SEC accused Antonio Martino, Silvergate's onetime CFO, of misleading investors about losses incurred by the La Jolla, California-based bank following the November 2022 collapse of FTX. Martino 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 penalties against Silvergate for deficiencies in internal monitoring.
The SEC said that Silvergate did not conduct appropriate monitoring in 2021 and 2022 of its main product, known as the Silvergate Exchange Network, the key mechanism for the bank's crypto asset customers to transfer funds amongst themselves. The bank's system failed to monitor roughly $1 trillion in suspicious banking transactions related to its crypto currency exchange, according to the SEC.
"The Bank also failed to detect nearly $9 billion in suspicious transfers by FTX and its related entities," the SEC said in a complaint filed Monday in the U.S. District Court for the Southern District of New York.
Lane and Fraher misrepresented the operational and legal risks facing Silvergate Bank by 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 heightened risks posed by its crypto asset customers, the SEC said.
Lane and Fraher settled with the SEC without admitting to 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 officer-and-director bars, SEC said in a press release.
Haima Marlier, a lawyer at Morrison and Foerster who represents Fraher, declined to comment. A lawyer for Lane did not immediately return a call seeking comment.
After the failure of FTX caused panic in the crypto industry — leading to a run on Silvergate and a severe liquidity crisis — the SEC said that Martino engaged in a fraudulent scheme to mislead investors and regulators about the bank's financial condition.
In need of cash, the bank had sold a large chunk of its bond portfolio in the fourth quarter of 2022. But the value of its bond investments sunk when interest rates rose, so Silvergate was forced to take a hit on the sale.
The lawsuit alleges that Martino and other bank leaders knew it would have to dump more of its bonds at a loss — thus eroding its capital cushion further. By understating the amount of bonds it needed to get rid of, the bank was able to mask the financial hit it would soon be forced to take, prosecutors said.
Martino "knew or recklessly disregarded that the bank was more likely than not to be required to sell far more" in securities than it had told investors, prosecutors said. Rather than $200 million in additional securities sales that the Martino had "falsely implied" were needed, the bank ended up selling some $1 billion, the lawsuit said.
Adam Lurie, a lawyer representing Martino, said that 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 claims in court. The SEC is inappropriately seeking, with the benefit of hindsight, to substitute its business judgment with decisions that Mr. Martino — a career finance professional — made in real time."
Silvergate announced on March 8, 2023, that it would liquidate and cease operations. The bank faced a potential enforcement action by bank regulators, high costs to remediate its BSA/AML program and an auditor's demand that the bank correct its financial statements concerning losses from expected securities sales, the SEC said.
The Fed and California's DFPI issued a joint cease and desist order against the bank on May 23, 2023 to facilitate the bank's voluntary liquidation.
Polo Rocha and Kevin Wack contributed to this report.
