Silvergate Bank didn’t adequately monitor $1 trillion in crypto transactions, SEC says

Silvergate Bank, once a cornerstone of the crypto financial world until its collapse in early 2023, defrauded its investors by lying about its anti-money laundering controls and misleading investors about how the fallout from the FTX collapse would affect it, the Securities and Exchange Commission says in a lawsuit. Also named in the suit were the company’s chief executive officer, chief risk officer, and chief financial officer.

Silvergate agreed to pay $50 million to settle the charges, without admitting or denying the allegations, the SEC said in a statement. CEO Alan Lane and CRO Kathleen Fraher also settled for $1 million and $250,000 each.

Silvergate said it had an effective anti-money laundering (AML) program tailored specifically to crypto but actually didn’t adequately monitor “approximately $1 trillion” in transactions, the complaint says. Silvergate also didn’t notice “nearly $9 billion in suspicious transfers” by FTX entities.

At that point, Silvergate’s chief financial officer Antonio Martino “engaged in a fraudulent scheme to mislead investors about the Bank’s dire financial condition,” the SEC alleges. Martino knew the bank had borrowed billions, which it would have to repay in January and February 2023. The only way that could happen would be by selling securities, but Martino approved an earnings release 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.”

That earnings release understated Silvergate’s losses from its securities sales, the SEC complaint alleges. Martino also lied on the bank’s quarterly earnings call, according to the complaint.

At the heart of the SEC’s allegations is the network Silvergate ran to allow crypto customers to transact at all hours, called SEN. This was used by, among others, stablecoin issuers such as Circle, Paxos, and Gemini. Though Silvergate said SEN was safe, the SEC says the network wasn’t being automatically monitored for suspicious transactions for “at least 15 months prior to November 2022.”

What’s more, on several occasions in 2022, the bank’s government examiners made it clear to the C-suite that Silvergate’s program for compliance with the Bank Secrecy Act was inadequate.

The earnings statement for the first quarter of 2023 wasn’t the only one alleged to contain fraud. In November 2022, the company suggested to investors that it had a “state-of-the-art” compliance program. In reality, the SEC says there was no automatic monitoring for several months before that earnings statement was released.

Update July 1, 4:45PM ET: Adds settlement, more details on FTX.