U.S. SEC Sues Crypto-Friend Silvergate Bank, Alleging ‘Misleading’ Statements Around AML Program

The SEC filed a lawsuit against the former CEO Alan Lane, former COOs Kathleen Fraher and Antonio Martino, accusing them of failing to implement adequate suspicious activity monitoring at the bank, despite being alerted by government examiners that our Bank Secrecy Act compliance was subpar.

Prior to November 2022, on numerous instances, Lane and Fraher, along with SCC, received information indicating that Silvergate Bank had significant issues with its Anti-Money Laundering (BSA/AML) compliance program. Furthermore, the findings from several Federal Reserve examinations of Silvergate, conducted by the Federal Reserve Bank of San Francisco (FRBSF), should have made Lane and Fraher aware of these critical noncompliance matters.

The SEC’s complaint includes a charge against Silvergate for overlooking approximately $9 billion in questionable transactions carried out by FTX before the latter filed for bankruptcy in November 2022.

As an analyst, I would rephrase the given statement as follows:

As a researcher, I’ve come across information suggesting that Silvergate’s team was notified by Bank Secrecy Act examiners that their efforts fell short of expectations, according to the lawsuit. However, the team persisted in maintaining that there were no risk factors to disclose in their quarterly and annual reports (10-Q and 10-K forms).

As a researcher examining a 2021 quarterly filing, I’ve come across an intriguing revelation: the banking institution acknowledged the existence of elevated risks due to some crypto-related clients. However, it’s important to note that this disclosure did not extend to mentioning that senior executives had become privy to these very same deficiencies.

A Silvergate spokesperson declined to comment.

Liquidation

During the crypto sector’s turbulent “crypto winter,” Silvergate, a well-known bank serving major digital currency businesses, chose to close its doors voluntarily amidst intense industry challenges. In contrast, Silicon Valley Bank and Signature Bank were forced into closure and liquidation by U.S. authorities. Unlike these two institutions, Silvergate initiated the process of winding down its operations without intervention from the government or the need for federal assistance to cover depositor payouts.

The collapse of Silvergate and two other institutions set off a series of chaotic months in the US banking sector, during which digital asset companies found themselves struggling to secure elusive financial connections amidst growing skepticism towards crypto.

As a crypto investor, I’ve witnessed Silvergate’s meteoric rise from a small community bank to a leading financial partner in the digital assets sector. However, the downfall came swiftly. In a March 2023 securities filing, the firm revealed that it had accelerated sales of securities to generate cash for repaying advances from the Federal Home Loan Bank of San Francisco. The writing was on the wall, and I couldn’t help but notice the warning signs even before then. Silvergate experienced a staggering loss of over $8 billion in deposits from its crypto customers towards the end of 2022.

As a crypto investor, I’ve closely followed the October 2023 report released by the Federal Reserve’s inspector general regarding Silvergate. The findings were concerning for me, as the report indicated that Silvergate’s management had been ineffective in my perspective. Moreover, the federal regulators tasked with overseeing their operations apparently failed to keep up with the evolving nature of their business, which added to my unease.

UPDATE (July 1, 2024, 20:05 UTC): Adds additional detail.