The U.S. Securities and Exchange Commission (SEC) sued Silvergate Capital Corporation, the parent company to crypto-friendly Silvergate Bank, on Monday, alleging the bank did not meet Bank Secrecy Act/anti-money laundering regulations despite telling members of the public and shareholders that it did.
The SEC also sued former CEO Alan Lane, former COO Kathleen Fraher and former COO Antonio Martino, alleging in its complaint that the bank did not conduct sufficient suspicious activity monitoring despite warnings from government examiners that its Bank Secrecy Act compliance was inadequate.
"On several occasions prior to November 2022, Lane and Fraher – and through them SCC – became aware that the Bank had serious deficiencies in its BSA/AML compliance program," the complaint said. "In addition, through the results of multiple examinations of Silvergate by the Federal Reserve, through the Federal Reserve Bank of San Francisco (the 'FRBSF'), Lane and Fraher should have known that there existed critical deficiencies in the Bank’s BSA/AML compliance program."
As part of its complaint, the SEC alleged that Silvergate failed to detect nearly $9 billion worth of suspicious transfers by FTX, which filed for bankruptcy in November 2022.
"For most of 2021 and 2022, the Bank had not conducted appropriate automated monitoring of its preeminent product, the 'Silvergate Exchange Network' (the 'SEN')," the complaint said. "The SEN was a key mechanism for the Bank’s crypto asset customers to transfer funds amongst themselves and was tailormade to attract crypto asset customers. But the Bank failed to adequately or automatically monitor for suspicious activity approximately $1 trillion in banking transactions that occurred on the SEN."
Silvergate's team received word from Bank Secrecy Act examiners that its efforts were inadequate, the suit alleged, but still claimed that there were no risk factors in its quarterly or annual reporting (10-Q and 10-K forms).
A 2021 quarterly filing did "acknowledge" that the bank faced a "heightened risk" due to some of its crypto customers, but the bank did not disclose that its executives had been made aware of these deficiencies.
A Silvergate spokesperson declined to comment.
Read More: The Rise and Fall of Silvergate’s Crypto Business
Liquidation
Silvergate, which had been the go-to bank for major crypto businesses, voluntarily folded under the pressure of the sector's epic headwinds and was the first of three technology-tied lenders to be shuttered during that period's so-called crypto winter. The other two — Silicon Valley Bank and Signature Bank — were seized and liquidated by U.S. authorities, while Silvergate had moved to wind itself down without government intervention or a need for federal help to pay back depositors.
The loss of Silvergate and the other two institutions touched off months of U.S. banking mayhem that also left digital assets companies scrambling for hard-to-find financial relationships as crypto fell further out of favor.
Silvergate had experienced a rapid rise from being a tiny community bank to becoming the digital assets sector's leading financial partner, but its descent was even faster. The end was tied to a March 2023 securities filing disclosing that the firm, which had bet its future on the crypto industry, accelerated sales of securities to raise cash to repay advances from the Federal Home Loan Bank of San Francisco. But the warning signs had been there previous to that as the institution lost more than $8 billion in deposits from its crypto customers in the final months of 2022.
The Federal Reserve's inspector general concluded in an October 2023 report that Silvergate's management had been "ineffective," and its minders from the federal regulator failed to adjust to what was going on with the business.
Read More: Fed Report: Silvergate Bank Got Fatally Ensnared in Crypto While Examiners Shrugged
UPDATE (July 1, 2024, 20:05 UTC): Adds additional detail.