Defunct crypto-friendly Silvergate Bank failed to monitor more than $1 trillion in customer transactions between 2021 and 2023, while misleading investors about the efficacy of its anti-money laundering controls, the Securities and Exchange Commission said in a lawsuit Monday.
The bank also misled investors on how the collapse of FTX, one of its largest customers, would affect its financial position, according to the lawsuit.
Silvergate’s parent company, Silvergate Capital Corp., agreed to settle with the regulator for $50 million without admitting or denying any charges. Two executives, CEO Alan Lane and Chief Risk Officer Kathleen Fraher, settled for $1 million and $250,000, respectively, and agreed to a five-year ban on holding officer or director positions at another public company.
However, also Monday, Silvergate was hit with $63 million in penalties by the Board of Governors of the Federal Reserve System and California’s Department of Financial Protection and Innovation over its allegedly lackluster AML program. Silvergate is based in La Jolla, California, and DFPI is its in-state regulator.
Silvergate’s payment to the SEC may be offset by penalties paid to the Fed and the DFPI.
“Rather than coming clean to investors about serious deficiencies in its compliance programs in the wake of the collapse of FTX, one of Silvergate’s largest banking customers, they doubled down in a way that misled investors about the soundness of the programs,” said Gurbir S. Grewal, director of the SEC’s Division of Enforcement, in a prepared statement. “In fact, because of those deficiencies, Silvergate allegedly failed to detect nearly $9 billion in suspicious transfers among FTX and its related entities. Silvergate’s stock eventually cratered, wiping out billions in market value for investors.”
One former Silvergate executive, ex-CFO Antonio Martino, declined to settle. The SEC charged him separately with lying to investors about company losses from expected securities sales following the collapse of crypto exchange FTX.
The SEC alleged that, after the fall of FTX, Martino “engaged in a fraudulent scheme to mislead investors about the Bank’s dire financial condition.”
Martino “knew that the Bank had borrowed billions of dollars in 2022, which was scheduled to mature in January and February 2023, and he knew that the Bank’s only viable source of funding to repay that debt would be to sell billions in securities in the First Quarter of 2023,” the SEC said.
The SEC alleged he fraudulently approved an earnings release in early 2023 that “falsely stated the Bank expected to sell only $1.7 billion in securities during the First Quarter of 2023, of which it had already sold $1.5 billion.”
Martino, who is now CFO at fintech PayZen, “categorically denies” the regulator’s allegations, according to an emailed statement from his attorney, Adam Lurie of Linklaters.
“Here, the SEC is inappropriately seeking, with the benefit of hindsight, to substitute its business judgment with decisions that Mr. Martino — a career finance professional — made in real time,” said Lurie, who represents Martino alongside Linklaters partner Doug Davison. “Mr. Martino acted reasonably and in good faith throughout his time at Silvergate. He denies any wrongdoing and intends to challenge the SEC's claims in court.”
Davison said in an emailed statement that Martino “received no personal benefit from the conduct alleged by the SEC” and “did not receive a bonus in relation to the relevant period and he never sold any securities related to the company. He is a career financial professional whose leadership protected depositors and should be lauded.”
The bank shuttered in March 2023 following months of financial turmoil related to crypto market volatility.
