SEC Accuses Silvergate of ‘Misleading’ Investors On its Relation with FTX

On Monday, the US Securities and Exchange Commission (SEC) filed charges against the now-defunct Silvergate bank. The market regulators accused the Silvegate team of misleading the public and failing to monitor over $1 trillion in transactions. 

The SEC noted that the crypto-friendly banks facilitated that transfer of $9 billion from the bankrupt Bahamian crypto exchange FTX. This transaction was made before FTX was declared bankrupt.

SEC Accuse Silvergate for Violating Securities Law

The SEC noted that Silvergate former chief executive Alan Lane, chief operation officer Kathleen Fraher, and chief finance officer Antonio Martino breached the securities law. 

The market regulator accused Silvergate’s top-level management, led by Lane and Fraher, of presenting misleading information concerning the bank compliance programs. 

In response to the charges, the Silvergate bank agreed to settle a $50 million civil penalty. The court report shows that Silvergate did not approve or deny the regulator’s accusations.

Consecutively, Lane and Fraher settled $1 million and $250,000 court fines, respectively.  Martino has not rejected those charges and has made no payment to pay the criminal charges. 

Martino was accused of defrauding the customers by presenting falsified information concerning the bank’s financial position. The FTX saga was witnessed in 2022 and impacted the liquidation of the best-performing banks, such as Signature Bank and Silicon Valley Bank. 

Factors Contributing to the 2023 Bank Run

The collapse of the three banks represented the third largest bank run, forcing the government to intervene and step in. The collapse of the three banks was caused by the FTX victims withdrawing millions from banks.

Initially, Silvergate gained popularity by offering real estate lending services and other financial products. With the changes in the financial sector, Silvergate expanded its product offerings to meet the ever-changing needs of consumers. 

In 2017, the bank launched the Silvergate Exchange Network, which offered a complete suite of crypto-related services. To solidify its market position, Silvergate offered round-the-clock services, attracting a substantial customer base of institutional clients. 

Silvergate announced plans to wind down operations in March after the institutional customers affected by the FTX withdrew millions of dollars from the bank. The Silvergate team complained that uncertainty in the crypto market and regulatory pressure forced the bank to wind down operations involuntarily.

The 2023 bank run attracted the global regulator’s attention to investigate why the banks were liquidated. 

A statement from the SEC director of the enforcement division, Gurbir Grewal, stated that Silvergate misled investors after being affected by the collapse of FTX. The commissioner noted that after the collapse of FTX, the Silvergate team led by the CFO presented falsified reports on security losses. 

SEC Accuse Silvergate of Misrepresenting Data

The agency noted that the misrepresented data was a tactic used by the bank to sustain its operation. Reviewing the Silvergate report, the SEC pointed out that the bank claimed to generate $5.2 billion in debt in securities and obtained a $ 4.3 billion loan from the Federal Home Loan Bank (FHLB). 

The market regulators noted that after the collapse of FTX, the Silvergate team assessed 300 suspicious transactions. The commission acknowledged that the bank attached the suspicious transaction with the FTX custodial account, which was used to store customers’ funds. 

The SEC noted that the Silvergate officials presented misleading statements to conceal their unlawful activities. Citing a CNBC report, the SEC observed that Lane shared misleading information concerning the Silvergate compliance. 

The executive told CNBC that Silvergate focused on improving its compliance and has worked to meet the existing regulatory requirements.  The regulators noted that Silvergate misled investors regarding its anti-money laundering measures and bank secrecy.

The FTX saga was among the largest financial frauds in history. The court report shows that FTX’s top executives misused company money to fund their lavish lifestyle. The damages caused by the collapse of FTX subjected Sam Bankman Fried to 25 years imprisonment. 

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