Silvergate Pays $63 Million To Settle $9 Billion Compliance Oversight Charges
Silvergate Capital Corp., the parent company of Silvergate Bank, has agreed to a $63 million settlement with U.S. and California regulators. The settlement addresses accusations of internal management failures and the dissemination of misleading information to investors, marking a significant development in the aftermath of the bank’s 2023 collapse.
The U.S. Securities and Exchange Commission (SEC) filed a lawsuit against Silvergate Capital Corporation, its former CEO Alan Lane, former COO Kathleen Fraher, and former CFO Antonio Martino. The SEC alleged that the bank misled the public and shareholders about having an effective Bank Secrecy Act (BSA) and anti-money laundering (AML) program, which was found to be inadequate.
The Federal Reserve and California’s Department of Financial Protection and Innovation (DFPI) also brought charges against the company.
“On several occasions prior to November 2022, Lane and Fraher – and through them SCC – became aware that the Bank had serious deficiencies in its BSA/AML compliance program,” the SEC’s complaint stated. “In addition, through the results of multiple examinations of Silvergate by the Federal Reserve, through the Federal Reserve Bank of San Francisco, Lane and Fraher should have known that there existed critical deficiencies in the Bank’s BSA/AML compliance program.”
The complaint also alleged that Silvergate’s executives were aware of these deficiencies but continued to assure investors of the bank’s robust BSA/AML compliance.
According to the SEC’s complaint, Silvergate, Lane, and Fraher agreed to settlements in which they neither admitted nor denied the allegations but will pay penalties. Additionally, Lane and Fraher agreed to a five-year ban on serving as officers or directors of any public company.
The settlement includes a $43 million penalty from the Federal Reserve and a $20 million penalty from the DFPI. The SEC also imposed a $50 million fine, which is not expected to increase the total amount due to potential offsets from payments to other regulators.
The SEC’s allegations highlight significant deficiencies in Silvergate’s operations, particularly in its failure to detect nearly $9 billion in suspicious transfers by major customer FTX, which filed for bankruptcy in November 2022. The complaint detailed that for most of 2021 and 2022, Silvergate did not conduct appropriate automated monitoring of its premier product, the Silvergate Exchange Network (SEN).
“The SEN was a key mechanism for the Bank’s crypto asset customers to transfer funds amongst themselves and was tailormade to attract crypto asset customers. But the Bank failed to adequately or automatically monitor for suspicious activity approximately $1 trillion in banking transactions that occurred on the SEN,” the agency said.
The SEC also cited misleading statements in Silvergate’s quarterly filings. “A 2021 quarterly filing did ‘acknowledge’ that the bank faced a ‘heightened risk’ due to some of its crypto customers,” the complaint said, “but the bank did not disclose that its executives had been made aware of specific deficiencies tied to its Bank Secrecy Act compliance.”
In a statement from his attorneys, former CFO Antonio Martino denied the allegations, attributing them to “judgement-driven” decisions tied to a single quarter in 2022. “These accusations are tied to a single quarter in 2022 and pertain to judgment-driven decisions,” Martino’s attorneys said.
A Silvergate spokesperson said that the settlements are part of the bank’s ongoing efforts to wind down.
“In early March 2023, Silvergate made a responsible decision to liquidate voluntarily and without government assistance. As of November 2023, all deposits had been repaid to banking customers and Silvergate ceased banking operations soon after. The settlements announced today, which will facilitate the surrender of Silvergate’s bank charter, are part of the Bank’s continued orderly wind down and successfully conclude investigations by the Federal Reserve, DFPI and SEC,” the spokesperson said in an emailed statement.
Silvergate’s voluntary liquidation and wind-down were significant as it was one of the first major banks serving the cryptocurrency industry to collapse. This event was part of a broader financial turmoil that saw the demise of other technology-tied lenders such as Silicon Valley Bank and Signature Bank, both of which were seized and liquidated by U.S. authorities.
The loss of Silvergate and other institutions triggered months of banking instability in the U.S., leaving digital asset companies scrambling for new financial partnerships as the cryptocurrency sector faced increased scrutiny and regulatory pressure.
Silvergate’s rise from a small community bank to a leading financial partner in the digital assets sector was swift, but its decline was even faster. The end came in March 2023 when the firm disclosed in a securities filing that it had to accelerate sales of securities to raise cash to repay advances from the Federal Home Loan Bank of San Francisco. The institution had already lost more than $8 billion in deposits from its crypto customers in the final months of 2022.
In October 2023, a report from the Federal Reserve’s inspector general concluded that Silvergate’s management was “ineffective,” and the federal regulators overseeing the bank failed to adapt to the evolving risks in the business.
Information for this briefing was found via CoinDesk and the sources mentioned. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.
