FTX-Related Failures Led This Bank to $63 Million in Penalties

Silvergate Capital Corp., the parent of the now-collapsed crypto-friendly Silvergate Bank, and its top former executives have agreed to pay a combined $63 million as civil penalties to settle charges with the federal and California regulators for internal management and disclosure failures, including its dealings with crypto exchange FTX.

Hefty Fine for Years of Negligence

As announced yesterday (Monday), California’s Department of Financial Protection & Innovation (DFPI) imposed a civil penalty of $20 million, with another $43 million imposed by the Federal Reserve Board. The Securities and Exchange Commission (SEC) imposed an additional penalty of $50 million, which will be offset by the other penalties.

Collapsed in March 2023, Silvergate Bank made its name after it started to offer banking services to cryptocurrency companies in 2013. In its initial public offering (IPO) filing in November 2018, the bank revealed it had more than 500 crypto clients, and this number went up to more than 750 when it was listed on the New York Stock Exchange in 2019. It even had an internal settlement tool for crypto-related transactions.

Furthermore, it had strong ties with the now-bankrupt crypto exchange FTX, which led to regulatory investigations into the bank.

Heavy Charges Against the Operator and Executives

Now, the SEC has sued the bank operator, its former CEO Alan Lane, and its former COO Kathleen Fraher, with allegations of misleading investors about the strength of the Bank Secrecy Act/Anti-Money Laundering (BSA/AML) compliance program and the monitoring of crypto customers, including FTX. Further, the former CFO Antonio Martino has been charged with misleading investors about losses from expected securities sales following FTX’s collapse.

The allegations even highlighted that the bank failed to detect the $9 billion suspicious transfers made by major FTX customers.

Except for Martino, others have agreed to settle the charges without admitting or denying the allegations. Martino has been charged with violating certain antifraud and books-and-records provisions of the federal securities laws, along with aiding and abetting certain of Silvergate’s violations.

“At all times, but especially during moments of crises, public companies and their officers must speak truthfully to the investing public,” said Gurbir Grewal, Director of the SEC’s Division of Enforcement. “Here, we allege that Silvergate, Lane, and Fraher fell not only woefully, but also fraudulently, short in that regard.”

“Rather than coming clean to investors about serious deficiencies in its compliance programs in the wake of the collapse of FTX, one of Silvergate’s largest banking customers, they doubled down in a way that misled investors about the soundness of the programs.”