The Securities and Exchange Commission charged Silvergate Capital, its former CEO Alan Lane, and former Chief Risk Officer Kathleen Fraher with misleading investors about the strength of the Bank Secrecy Act/Anti-Money Laundering (BSA/AML) compliance program and the monitoring of crypto customers, including FTX. The SEC also charged Silvergate and its former Chief Financial Officer, Antonio Martino, with misleading investors about the company’s losses from expected securities sales following FTX’s collapse.
According to the SEC’s complaint, Silvergate, Lane, and Fraher misled investors in stating that Silvergate had an effective BSA/AML compliance program and conducted ongoing monitoring of its high-risk crypto customers, including FTX, in part to deny public rumors that FTX had used its accounts at Silvergate to enable FTX’s misconduct. In reality, Silvergate’s automated transaction monitoring system failed to monitor more than $1 trillion of transactions by its customers on the bank’s payments platform, the Silvergate Exchange Network.
“At all times, but especially during moments of crises, public companies and their officers must speak truthfully to the investing public. Here, we allege that Silvergate, Lane and Fraher fell not only woefully, but also fraudulently, short in that regard,” said Gurbir Grewal, Director of the SEC’s Division of Enforcement. “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. 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.”
SEC Alleges Silvergate Hid Its Financial Condition
The SEC’s complaint also alleges that Silvergate and Martino misrepresented the company’s bleak financial condition during a liquidity crisis and bank run following FTX’s collapse. The complaint alleges that Silvergate and Martino, in an earnings release and earnings call, understated Silvergate’s losses from expected security sales and misrepresented that it remained well-capitalized as of December 31, 2022. In March 2023, Silvergate announced it would wind down its banking operations, and its stock eventually plummeted to near $0.
The SEC charged Martino with violating certain of the antifraud and books-and-records provisions of the federal securities laws, and with aiding and abetting certain of Silvergate’s violations. The complaint also charges Silvergate, Lane, and Fraher with fraud and charges Silvergate with violating certain reporting, internal accounting controls, and books-and-records provisions.
Without admitting or denying the allegations, Silvergate agreed to a settlement ordering it to pay a $50 million civil penalty and imposing a permanent injunction to settle the charges. Lane and Fraher also settled the charges without admitting or denying the allegations, agreeing to permanent injunctions, five-year officer-and-director bars, and fines of $1 million and $250,000 respectively.
All the settlements require court approval, and Silvergate’s payment may be offset by penalties paid to the Board of Governors of the Federal Reserve System (FRB) and/or the California Department of Financial Protection and Innovation (DFPI). In parallel actions, FRB and DFPI today announced settled charges against Silvergate. 
Jacob Horowitz is a contributing editor at Internal Audit 360°