Crypto bank fined for alleged oversight failures

At the same time, the U.S. Securities and Exchange Commission (SEC) charged Silvergate Capital and two executives — former CEO Alan Lane and former chief risk officer Kathleen Fraher — with allegedly misleading investors and violating reporting, internal controls and books and records requirements.

Specifically, the SEC alleged that Silvergate — which pivoted its business to the emerging crypto sector starting in 2014 — and its executives misled investors when they sought to rebut speculation that bankrupt crypto platform FTX used its accounts at Silvergate to facilitate its misconduct.

The regulator said they had “misrepresented the operational and legal risks the bank faced by falsely stating in SEC filings and other public statements” that it had effective anti-money laundering controls appropriate to the additional risks posed by its crypto-asset clients, “including one of its now most notorious clients, FTX.”

The SEC said the bank’s controls were inadequate and its automated systems failed to adequately detect suspicious activity on its roughly $1 trillion payments platform. The regulator also said the bank failed to detect nearly $9 billion in suspicious transfers made by FTX.

“At all times, and especially in times of crisis, publicly traded companies and their executives must speak honestly with investors. We allege that Silvergate, Lane, and Fraher have not only egregiously failed, but also fraudulently failed, in this regard,” Gurbir Grewal, director of the SEC’s Division of Enforcement, said in a statement.

“Rather than reveal to investors the serious deficiencies in its compliance programs following the collapse of FTX, one of Silvergate's largest banking clients, they redoubled their efforts to mislead investors about the strength of the programs. … Silvergate's stock ultimately collapsed, wiping out billions of dollars in market value for investors,” he added.

Without admitting or denying the SEC's allegations, Silvergate agreed to a final judgment ordering it to pay a $50 million civil penalty (which may be offset by the $63 million penalty imposed by the Fed and the California DFPI) and imposing a permanent injunction to resolve the charges.

Lane and Fraher also both reached settlements without admitting or denying the allegations, agreeing to permanent injunctions, five-year bans on officers and directors, and civil penalties of $1 million and $250,000, respectively. All settlements are subject to court approval.

The SEC also accused Silvergate and its former CFO, Antonio Martino, of allegedly misleading investors about the company's financial condition after FTX collapsed, which caused a liquidity crisis at the bank.

The regulator also alleged that Silvergate and Martino “understated Silvergate’s losses from expected securities sales and made a false statement that the company remained well capitalized” in a news release and earnings call. The allegations against Martino have not been proven in court.

Last year, Silvergate announced that it was voluntarily winding down its operations.

The Fed said the bank has now repaid all of its customers' deposits.