The United States Securities and Exchange Commission (SEC) has filed a lawsuit against Silvergate Capital Corporation, the parent company of a crypto-friendly bank, accusing it of facilitating fraud at the now-defunct exchange FTX. The lawsuit, filed on July 1 in the U.S. District Court for the Southern District of New York, claims that Silvergate, former CEO Alan Lane, and former Chief Risk Officer Kathleen Fraher misled investors about the effectiveness of its Bank Secrecy Act/Anti-Money Laundering (BSA/AML) compliance program and its monitoring of crypto customers, including FTX.
Allegations of Misconduct and Fraud
According to SEC enforcement director Gurbir Grewal, Silvergate allegedly failed to detect nearly $9 billion in suspicious transfers among FTX and its related entities, resulting in significant losses for investors. Grewal stated that Silvergate and its executives “doubled down” on misleading investors after FTX’s collapse from November 2022 to January 2023.
The SEC also charged former Silvergate Chief Financial Officer Antonio Martino with misleading investors about the company’s losses from expected securities sales following FTX’s collapse. While all other parties have agreed to settle with the SEC, Martino has decided to fight the allegations in court. “The allegations made by the SEC are unfounded and irresponsible, and I look forward to presenting my case in court and clearing my name,” said Martino in a statement provided by his attorneys at Linklaters.
Settlement Details
Silvergate has agreed to pay a $50 million civil penalty without admitting or denying the allegations, while Lane and Fraher agreed to pay $1 million and $250,000, respectively. These settlements are subject to court approval. The SEC’s enforcement action coincides with a settlement between Silvergate and the Board of Governors of the Federal Reserve System and the California Department of Financial Protection and Innovation.
Also Read: Silvergate Bank to Liquidate Assets and Wind Down Operations
Background and Broader Implications
Silvergate voluntarily liquidated in March 2023 after multiple crypto firms severed ties with the bank, citing its connections to FTX. 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 complaint notes that under Bankman-Fried, FTX directed customers to wire money to Alameda’s account with Silvergate in exchange for assets on the crypto exchange.
The SEC’s action comes after a judge approved a class-action lawsuit filed by FTX users against Silvergate, alleging that the bank was aware of fraudulent activity at the crypto exchange. Silvergate has denied these allegations.
Legal Developments Impacting SEC Enforcement
Recent opinions from the U.S. Supreme Court, released on June 27 and 28, may influence how the SEC handles crypto enforcement cases. One opinion held that defendants in SEC civil cases involving securities fraud are entitled to a jury trial, potentially impacting the strategy and outcomes of such cases.
