The U.S. Securities and Exchange Commission said in a lawsuit on Monday that crypto-friendly Silvergate bank failed to monitor more than $1 trillion in customer transactions between 2021 and 2023 and misled investors about the effectiveness of its anti-money laundering measures.
According to the lawsuit, the bank also misled investors about how the collapse of FTX, one of its largest clients, would affect the bank’s financial condition.
Silvergate’s parent company, Silvergate Capital, agreed to settle with regulators for $50 million without admitting or denying the charges. Two other executives, CEO Alan Lane and Chief Risk Officer Kathleen Fuller, settled for $1 million and $250,000, respectively, and agreed to be banned for five years from holding officer or director positions at other public companies.
However, also on Monday, Silvergate was fined $63 million by the Federal Reserve and the California Department of Financial Protection and Innovation for failing to implement an adequate AML program. Silvergate is based in La Jolla, California, and DFPI is its regulator in the state.
Any amount Silvergate pays to the SEC may be offset by penalties paid to the Fed and DFPI.
“Following the collapse of FTX, Silvergate’s largest banking client, rather than honestly communicating with investors about the significant deficiencies in its compliance program, the company went further in a manner that misled investors about the soundness of its program,” SEC Enforcement Division Director Gurbir S. Grewal said in a prepared statement. “Indeed, these deficiencies allegedly caused Silvergate to fail to detect approximately $9 billion in suspicious transfers between FTX and its affiliated companies. Silvergate’s stock price ultimately collapsed, causing investors to lose billions of dollars in market value.”
Former Silvergate executive and CFO Antonio Martino declined to settle after the SEC separately charged him with misrepresenting to investors the company’s expected losses from securities sales following the collapse of cryptocurrency exchange FTX.
The SEC alleged that after FTX’s collapse, Martino “engaged in a fraudulent scheme to mislead investors about the bank’s serious financial condition.”
“Martino knew that the bank would borrow billions of dollars in 2022 that would mature in January and February 2023 and that the bank’s only viable source of funds to repay that debt was to sell billions of dollars of securities in the first quarter of 2023,” the SEC said.
The SEC alleged that he fraudulently approved an earnings release in early 2023 that “falsely stated that the bank planned to sell only $1.7 billion of securities in the first quarter of 2023, of which $1.5 billion had already been sold.”
Martino, who is now chief financial officer at fintech company Pazen, “categorically denies” the regulators’ allegations, according to an emailed statement from Linklaters lawyer Adam Lurie.
“The SEC improperly seeks to substitute its business judgment for decisions made in real time by Mr. Martino, a financial professional, in hindsight,” said Lurie, who is representing Mr. Martino with Linklaters partner Doug Davison. “Mr. Martino acted reasonably and in good faith during his tenure at Silvergate. He denies any wrongdoing and intends to challenge the SEC’s allegations in court.”
In an emailed statement, Davison said Martino “did not personally benefit from the conduct alleged by the SEC.” He “did not receive any bonuses for the period in question and did not sell any securities related to the company. Martino has a career as a financial professional and deserves credit for his leadership in protecting depositors.”
The bank closed in March 2023 after months of financial turmoil linked to fluctuations in the cryptocurrency market.
