The parent company behind a cryptocurrency-friendly bank, Silvergate Capital Corporation, is facing a lawsuit from the United States Securities and Exchange Commission (SEC) for its alleged involvement in facilitating fraud at the defunct exchange FTX.
In a filing made on July 1 in the U.S. District Court for the Southern District of New York, the SEC accused Silvergate, former CEO Alan Lane, and former Chief Risk Officer Kathleen Fraher of deceiving investors about the strength of its Bank Secrecy Act/Anti-Money Laundering compliance program and the oversight of crypto customers like FTX.
The commission also charged former Silvergate Chief Financial Officer Antonio Martino with deceiving investors about the company’s losses from expected securities sales following FTX’s collapse. All parties, with the exception of Martino, have agreed to settle with the SEC.
Martino, who has denied the allegations, stated, “The allegations made by the SEC are unfounded and irresponsible, and I look forward to presenting my case in court and clearing my name,” according to a statement provided by his attorneys at law firm Linklaters to Cointelegraph.
According to SEC enforcement director Gurbir Grewal, Silvergate allegedly failed to detect nearly $9 billion in suspicious transfers among FTX and its related entities, leading to substantial losses for investors. He alleged the firm and its executives doubled down on misleading investors following FTX’s collapse from November 2022 to January 2023.
The SEC announced that Silvergate had agreed to pay a $50 million civil penalty without admitting or denying the allegations, while Lane and Fraher agreed to pay $1 million and $250,000, respectively. The settlements are pending court approval. The SEC’s enforcement action occurred concurrently with a settlement between Silvergate and the Board of Governors of the Federal Reserve System and the California Department of Financial Protection and Innovation.
Silvergate voluntarily liquidated in March 2023 after several cryptocurrency firms announced they intended to cut ties to the bank, alleging links to FTX. FTX collapsed and filed for bankruptcy in November 2022, resulting in criminal charges against several executives, including former CEO Sam Bankman-Fried, who is currently serving a 25-year sentence in federal prison.
The complaint stated that under Bankman-Fried, FTX had directed customers to wire money to Alameda’s account with Silvergate in exchange for assets on the cryptocurrency exchange. The former CEO also provided a testimonial for the cryptocurrency-friendly bank’s website, claiming it revolutionized banking for blockchain companies.
The SEC’s action also followed a judge’s approval of a class-action lawsuit filed by FTX users against Silvergate, alleging that the bank had been aware of fraudulent activity at the cryptocurrency exchange. The company has denied the allegations.
On June 27 and 28, the U.S. Supreme Court issued two opinions that could impact how the SEC handles cryptocurrency enforcement cases. One opinion held that defendants in SEC civil cases concerning securities fraud are entitled to a jury trial.