Crypto-Friendly Silvergate Bank Pays $63M to Settle Charges With SEC, Fed, California Regulator

Silvergate's executives were aware of 'critical deficiencies' in the bank's anti-money laundering protections, the SEC alleged.

Crypto-friendly bank Silvergate to pay $63 mln to settle U.S., California regulator charges

reuters.com

Nikhilesh De

Mon Jul 1, 2024

(Reuters) - Silvergate Capital Corp, the parent of a crypto-friendly bank whose 2023 collapse amplified the industry's banking crisis, has agreed to pay $63 million to settle U.S. and California regulators' accusations of internal management failings and the disclosure of bad information to investors.

The U.S. Securities and Exchange Commission (SEC) on Monday sued Silvergate Capital, former Chief Executive Officer Alan Lane, ex-Chief Operating Officer Kathleen Fraher and former Chief Financial Officer Antonio Martino, alleging the bank misled the public and shareholders about having an effective Bank Secrecy Act/anti-money laundering program when it didn't.

The Federal Reserve and California's Department of Financial Protection and Innovation (DFPI) separately levied similar charges against the La Jolla, California-based lender.

Silvergate, Lane and Fraher agreed to settlements where they will neither admit to nor deny the SEC's allegations, but will pay penalties. The two individuals also agreed to a five-year ban on being officers or directors of another public company. Silvergate also settled with both the Fed and DFPI.

Silvergate's penalties included $43 million from the Fed and $20 million from the California regulator, which had also cited deficiencies in how the bank kept track of internal transactions. The SEC imposed its own $50 million fine, too, but it wasn't expected to add to the total.

The settlements are subject to court approval, and the SEC said in its press release that any monetary penalty owed it might be offset by whatever Silvergate pays to the banking regulators.

Martino, the former chief financial officer, denied the allegations through a statement from his attorneys, saying those accusations are tied to a single quarter in 2022, and pertain to "judgement-driven" decisions.

"On several occasions prior to November 2022, Lane and Fraher – and through them SCC – became aware that the Bank had serious deficiencies in its BSA/AML compliance program," the complaint said. "In addition, through the results of multiple examinations of Silvergate by the Federal Reserve, through the Federal Reserve Bank of San Francisco (the 'FRBSF'), Lane and Fraher should have known that there existed critical deficiencies in the Bank’s BSA/AML compliance program."

As part of its complaint, the SEC alleged that Silvergate failed to detect nearly $9 billion worth of suspicious transfers by major customer FTX, which filed for bankruptcy in November 2022.

"For most of 2021 and 2022, the Bank had not conducted appropriate automated monitoring of its preeminent product, the 'Silvergate Exchange Network' (the 'SEN')," the complaint said. "The SEN was a key mechanism for the Bank’s crypto asset customers to transfer funds amongst themselves and was tailormade to attract crypto asset customers. But the Bank failed to adequately or automatically monitor for suspicious activity approximately $1 trillion in banking transactions that occurred on the SEN."

Silvergate's team received word from its government examiners that its efforts were inadequate, the suit alleged, but it still claimed that there were no risk factors in its quarterly or annual reporting (10-Q and 10-K forms).

A 2021 quarterly filing did "acknowledge" that the bank faced a "heightened risk" due to some of its crypto customers, but the bank did not disclose that its executives had been made aware of specific deficiencies tied to its Bank Secrecy Act compliance.

A Silvergate spokesperson told CoinDesk the settlements are part of the bank's ongoing efforts to wind down.

"In early March 2023, Silvergate made a responsible decision to liquidate voluntarily and without government assistance. As of November 2023, all deposits had been repaid to banking customers and Silvergate ceased banking operations soon after. The settlements announced today, which will facilitate the surrender of Silvergate's bank charter, are part of the Bank's continued orderly wind down and successfully conclude investigations by the Federal Reserve, DFPI and SEC," the spokesperson said in an emailed statement.

Voluntary liquidation

Silvergate, which had been the go-to bank for major crypto businesses, voluntarily folded under the pressure of the sector's epic headwinds and was the first of three technology-tied lenders to be shuttered during that period's so-called crypto winter. The other two — Silicon Valley Bank and Signature Bank — were seized and liquidated by U.S. authorities, while Silvergate had moved to wind itself down without government intervention or a need for federal help to pay back depositors.

The loss of Silvergate and the other two institutions touched off months of U.S. banking mayhem that

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