SEC Charges Silvergate Bank for Misleading Investors
Silvergate Bank has been charged by the Securities and Exchange Commission (SEC) for allegedly misleading investors about the effectiveness of its Anti-Money Laundering (AML) compliance program.
Charges Against Former Executives
The SEC has charged three former executives. These include ex-CEO Alan Lane, ex-Chief Risk Officer Kathleen Fraher, and ex-Chief Financial Officer Antonio Martino. All parties charged, except Martino, have agreed to settle the SEC’s charges.
False Assurances to Investors
According to the SEC’s complaint, between November 2022 and January 2023, Silvergate executives falsely assured investors that their AML compliance program was effective. They claimed to be continuously monitoring high-risk crypto customers like FTX, which went bankrupt in 2022. These statements aimed to counter public speculation that FTX had used Silvergate accounts for its misconduct.
Legal Troubles and Customer Transactions
In March, it emerged that FTX users were suing the now-defunct Silvergate. They alleged it abetted FTX and its affiliated trading firm Alameda Research in committing a historic fraud. On March 20, Judge Ruth Bermudez Montenegro of a San Diego federal court denied Silvergate’s motion to dismiss the case.
The SEC claims Silvergate’s automated transaction monitoring system failed to monitor over $1 trillion in customer transactions on the Silvergate Exchange Network.
SEC’s Allegations and Public Misrepresentation
Gurbir Grewal, director of the SEC’s Division of Enforcement, stated, “Public companies and their officers must speak truthfully to the investing public, especially during crises. We allege that Silvergate, Lane, and Fraher fell woefully and fraudulently short in this regard.” He emphasized that Silvergate misled investors about the soundness of its compliance programs following FTX’s collapse, rather than disclosing serious deficiencies.
Financial Misrepresentations and Market Impact
Due to these deficiencies, Silvergate allegedly failed to detect nearly $9 billion in suspicious transfers among FTX and its related entities. This led to a significant drop in Silvergate’s stock, wiping out billions in market value for investors.
The SEC’s complaint also accuses Silvergate and Martino of misrepresenting the company’s financial condition during a liquidity crisis and bank run after FTX’s collapse. They allegedly understated the bank’s losses from expected securities sales. They also falsely asserted that it remained well-capitalized as of December 31, 2022.
Conclusion of Banking Operations
In March 2023, Silvergate announced it would wind down its banking operations, causing its stock to plummet to near zero.
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