Silvergate Bank, once a cornerstone of the crypto-financial world, until it collapsed in early 2023, deceived its investors by lying about anti-money laundering and misleading investors about how it was submitted to FTX, the Securities and Exchange Commission. says the lawsuit. The suit also named the company's chief executive officer, chief risk officer, and chief financial officer.
The SEC said in a statement that Silvergate agreed to pay $50 million to settle the allegations without admitting or denying the allegations. CEO Alan Lane and CRO Kathleen Fraher also settled for $1 million and $250,000.
Silvergate said it had an effective anti-money laundering (AML) program specifically tailored for crypto use, but in reality it did not adequately monitor transactions "of approximately $1 trillion," the complaint said. Silvergate also failed to notice "nearly $9 billion in suspicious transactions" from FTX entities.
FTX was one of Silvergate's biggest clients, the SEC alleges. Days after the crypto exchange declared bankruptcy, a bankruptcy began that would ultimately kill Silvergate. Lane, aware of Silvergate's social media chatter, asked the bank to review its relationship with FTX. The audit found more than 300 suspicious transactions in 2022. The suspicious transfers totaled nearly $9 billion, the SEC's complaint said.
At the time, Silvergate's chief financial officer, Antonio Martino, engaged in a fraudulent scheme to mislead investors about the bank's poor financial condition, the SEC alleges. Martino knew that the bank had borrowed billions that would be repaid in January and February 2023. The only way that could happen would be to sell securities, but Martino agreed to an earnings report that "erroneously stated that the bank plans to sell only 1 ,7 billion securities in 2023 .in the first quarter of the year, of which it has already sold 1.5 billion dollars.
The SEC's complaint alleges that the proceeds will release an implied loss from the sale of Silvergate securities. Martino also lied during the bank's quarterly earnings call, according to the complaint.
Martino "categorically denies" the allegations, his attorney Adam Lurie said in a statement provided to The Verge by Rachel Katz, a spokeswoman for Martino's law firm Linklaters. "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," said Lurie, who was also quoted directly in the statement that Katz said was his.
At the center of the SEC's allegations is Silvergate, a network called SEN that allows crypto customers to make transactions at any time of the day or night. It has been used by stablecoin issuers such as Circle, Paxos and Gemini, among others. While Silvergate said SEN is secure, the SEC said the network was not automatically monitored for suspicious activity "for at least 15 months prior to November 2022."
In addition, the bank's board supervisors made it clear to Series C on several occasions in 2022 that Silvergate's program to comply with the Bank Secrecy Act was inadequate.
The earnings report for the first quarter of 2023 was not the only one that allegedly contained fraud. In November 2022, the company suggested to investors that it has a state-of-the-art compliance program. In fact, the SEC says, there was no automatic tracking for several months before the earnings report was released.
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