SEC Sues Silvergate Capital For Alleged Securities Fraud In Wake Of FTX Collapse

The Securities and Exchange Commission (SEC) has initiated a lawsuit against Silvergate Capital Corp. SICP, a California-based bank significantly impacted by the downfall of the cryptocurrency exchange FTX.

The lawsuit, which was filed in federal court in Manhattan, alleges “securities fraud” as indicated in a docket entry on Monday. This entry also lists several former Silvergate executives as defendants, although further specifics of the case were not disclosed, according to a Bloomberg report.

Silvergate, established in 1988, ventured into the cryptocurrency industry in 2013, distinguishing itself as one of the few traditional banks to serve the emerging digital asset sector.

The bank was recognized for its payment system that converted U.S. dollar deposits into digital assets for investors and digital asset companies. However, Silvergate became deeply entangled in the crypto sector’s decline during late 2022 and 2023.

The SEC's complaint alleges that between November 2022 and January 2023, Silvergate, along with Lane and Fraher, deceived investors by claiming that Silvergate had a robust Bank Secrecy Act/Anti-Money Laundering (BSA/AML) compliance program and actively monitored its high-risk crypto clients, including FTX, to counter public speculation that FTX had used its Silvergate accounts for misconduct.

The SEC also filed suit against former CEO Alan Lane, former COO Kathleen Fraher, and former CFO Antonio Martino.

“Silvergate's automated transaction monitoring system failed to monitor more than $1 trillion of transactions by its customers on the bank's payments platform, the Silvergate Exchange Network,” the SEC stated Monday.

“At all times, but especially during moments of crisis, public companies and their officers must speak truthfully to the investing public,” said Gurbir S. Grewal, director of the SEC's Division of Enforcement.

Grewal alleged that Silvergate, along with Lane and Fraher, not only failed but did so fraudulently in this duty. Instead of revealing serious flaws in their compliance programs following the collapse of FTX, one of Silvergate's major clients, they misled investors, resulting in the failure to detect nearly $9 billion in suspicious transfers, eventually causing Silvergate's stock to plummet and erasing billions in market value.

On Jan. 5, 2023, Silvergate revealed that the collapse of its client, FTX, had triggered a run on Silvergate Bank, resulting in a deposit decline of $8.1 billion, or over 68%, in the three months ending December 2022.

After failing to meet customer withdrawal demands, Silvergate announced in March 2023 its intention to wind down operations and liquidate, becoming one of the initial casualties in the 2023 US banking crisis.

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