The U.S. Securities and Exchange Commission (SEC) has brought charges against Silvergate Capital Corporation, its former CEO Alan Lane, and former Chief Risk Officer (CRO) Kathleen Fraher for allegedly misleading investors about the robustness of their AML compliance program and the monitoring of crypto customers, notably FTX. Additionally, the SEC has charged Silvergate and its former CFO (CFO), Antonio Martino, with providing false information regarding the company’s financial losses.
Allegations and Compliance Failures
According to the SEC’s complaint, from November 2022 to January 2023, Silvergate, along with Alan Lane and Kathleen Fraher, misled investors by claiming that Silvergate had an effective BSA/AML compliance program and that it was continuously monitoring its high-risk crypto clients, including FTX. These assertions were part of an effort to counter public speculation that FTX had used its accounts at Silvergate to facilitate misconduct. In reality, Silvergate’s automated transaction monitoring system failed to track over $1 trillion in transactions conducted by its customers on the Silvergate Exchange Network.
Financial Misrepresentation
The SEC’s complaint also accuses Silvergate and Antonio Martino of misrepresenting the company’s financial condition during the liquidity crisis and bank run that followed FTX‘s collapse. Specifically, it is alleged that Silvergate and Martino understated the company’s losses from anticipated securities sales and falsely claimed that Silvergate remained well-capitalized as of December 31, 2022. By March 2023, Silvergate announced its intention to wind down its banking operations, leading to its stock plummeting to near zero.
Legal Actions and Settlements
The SEC’s complaint, filed in the U.S. District Court for the Southern District of New York, charges Silvergate, Lane, and Fraher with negligence-based fraud and accuses Silvergate of violating various reporting, internal accounting controls, and books-and-records provisions.
Without admitting or denying the allegations, Silvergate has agreed to a final judgment that includes a $50 million civil penalty and a permanent injunction to settle the charges. Lane and Fraher also settled, agreeing to permanent injunctions, five-year officer-and-director bans, and civil penalties of $1 million and $250,000, respectively. These settlements are subject to court approval, and Silvergate‘s payment may be offset by penalties paid to the Board of Governors of the Federal Reserve System (FRB) and/or the California Department of Financial Protection and Innovation (DFPI).
Martino faces charges for violating antifraud and books-and-records provisions of federal securities laws and for aiding and abetting Silvergate’s violations.
