Silvergate agrees to pay $63 million to settle with U.S. regulators

Author: Nikhilesh De, Jesse Hamilton, CoinDesk; Translator: Deng Tong, Golden Finance

• Silvergate Bank’s parent company settled with the U.S. Securities and Exchange Commission, the Federal Reserve and the California Department of Financial Protection and Innovation over charges that it failed to maintain an adequate anti-money laundering program and made misleading disclosures about the effectiveness of the program.

• The SEC also charged former Silvergate executives. Former CEO Alan Lane and former COO Kathleen Fraher agreed to settle, while former CFO Antonio Martino denied the allegations.

Silvergate Capital Corp., the parent of a crypto-friendly bank whose 2023 collapse exacerbated the industry’s banking crisis, has agreed to pay $63 million to settle charges by U.S. and California regulators over internal management failures and poor disclosures to investors.

The U.S. Securities and Exchange Commission (SEC) on Monday sued Silvergate Capital Corporation, the parent of crypto-friendly Silvergate Bank, former CEO Alan Lane, former COO Kathleen Fraher and former CFO Antonio Martino, alleging that the bank misled the public and shareholders by claiming it had an effective Bank Secrecy Act/anti-money laundering program when it did not. The Federal Reserve and California’s Department of Financial Protection and Innovation (DFPI) have also filed similar charges against the La Jolla, California-based bank.

Silvergate, Lane and Fraher agreed to a settlement in which they neither admitted nor denied the SEC's allegations but will pay a fine and both agreed not to serve as officers or directors of other public companies for five years. Silvergate also reached settlements with the Federal Reserve and DFPI.

Silvergate's fine includes $43 million from the Fed and $20 million from California regulators, who also cited deficiencies in the bank's tracking of insider trading. The SEC also fined it $50 million but does not expect to increase the total fine. The settlement is subject to court approval, and the SEC said in its press release that any fine owed to it may be offset by any amount Silvergate pays to bank regulators.

Former CFO Martino denied the allegations through a statement from his attorney, saying they relate to a single quarter in 2022 and to “judgment-driven” decisions.

“Prior to November 2022, Lane and Fraher, and through them SCC, were repeatedly aware of the serious deficiencies in the bank’s BSA/AML compliance program,” the complaint states. “In addition, Lane and Fraher should have known of the serious deficiencies in the bank’s BSA/AML compliance program as a result of multiple examinations of Silvergate by the Federal Reserve through the Federal Reserve Bank of San Francisco (FRBSF).”

As part of the complaint, the SEC alleges that Silvergate failed to detect nearly $9 billion in suspicious transfers from a major client, FTX, which filed for bankruptcy in November 2022.

“For much of 2021 and 2022, the Bank failed to conduct adequate automated monitoring of its primary product, the Silvergate Exchange Network (SEN),” the complaint states. “The SEN was the bank’s key mechanism for moving funds between crypto clients and was specifically tailored to attract crypto clients. But the Bank failed to adequately or automatically monitor the approximately $1 trillion of bank transactions that occurred on the SEN for suspicious activity.”

The lawsuit alleges that Silvergate’s team received information from government examiners that its efforts were insufficient, but it still claimed there were no risk factors in its quarterly or annual reports (Forms 10-Q and 10-K).

The 2021 quarterly filings did “acknowledge” that the bank faced “high risk” due to some of its crypto clients, but the bank did not disclose that its executives were aware of specific deficiencies related to its compliance with the Bank Secrecy Act.

A Silvergate spokesperson told CoinDesk that the settlement is part of the bank’s ongoing efforts.

“In early March 2023, Silvergate made the responsible decision to voluntarily liquidate without government assistance. As of November 2023, all deposits were repaid to the bank’s customers and Silvergate ceased banking operations shortly thereafter. The settlement announced today will facilitate Silvergate’s relinquishment of its banking license as part of the bank’s continued orderly wind-down and successful conclusion of the Federal Reserve, DFPI and SEC investigations,” the spokesperson said in an emailed statement.

Voluntary Liquidation

Once the bank of choice for large cryptocurrency businesses, Silvergate voluntarily liquidated under the pressure of massive industry headwinds, becoming the first of three tech-focused lenders to fail during what was then known as the crypto winter. While the other two — Silicon Valley Bank and Signature Bank — were seized and liquidated by U.S. authorities, Silvergate failed on its own without government intervention or need for federal help to repay depositors.

The collapse of Silvergate and two other institutions set off months of chaos in the U.S. banking industry, with digital asset companies scrambling for hard-to-find financial partners as cryptocurrencies fell further out of favor.

Silvergate’s meteoric rise from a small community bank to a major financial partner in the digital asset industry has been even faster than its fall. The bankruptcy was tied to a March 2023 securities filing that revealed the company was betting its future on the cryptocurrency industry, accelerating the sale of securities to raise cash to repay an advance from the Federal Home Loan Bank of San Francisco. But warning signs were present before then, as the institution lost more than $8 billion in cryptocurrency customer deposits in the final months of 2022.

The Federal Reserve’s inspector general concluded in an October 2023 report that Silvergate’s management was “ineffective” and that supervisors from federal regulators had failed to adapt to the business as it progressed.