Regulators and researchers continue to pore over events leading up to the March 2023 failures of Silicon Valley Bank and Signature Bank and how they reverberated through the financial system. One recent finding, in a Federal Reserve Bank of New York staff report, is that not two banks, but 22, faced sudden and significant runs around the same time.
Excluded from that analysis was Silvergate Bank, which, under duress from turmoil in the cryptocurrency market and the demise of Sam Bankman-Fried’s FTX exchange, moved two days before SVB’s March 10 closing to voluntarily liquidate. Sixteen months later, the regulatory hammer has come down on Silvergate, costing the bank and its holding company $63 million in civil penalties. The former CEO and chief risk officer additionally settled with the Securities and Exchange Commission for $1 million and $250,000, respectively.
The SEC, which investigated in coordination with the Federal Reserve Board and California’s Department of Financial Protection and Innovation (DFPI), filed a 64-page complaint July 1 in U.S. District Court for the Southern District of New York alleging failings in anti-money laundering (AML) and transaction-reporting compliance and in public disclosures thereof.
Gurbir Grewal of the SEC: Investors were misled.
Silvergate, ex-CEO Alan J. Lane and Kathleen Fraher – who was CRO of the bank and parent Silvergate Capital Corp. from November 2022 to March 2023 and stayed on as chief transition officer for the liquidation – “fell not only woefully, but also fraudulently, short,” Gurbir S. Grewal, director of the SEC’s Division of Enforcement, said in a statement. “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.
“In fact,” Grewal went on, “because of those deficiencies, Silvergate allegedly failed to detect nearly $9 billion in suspicious transfers among FTX and its related entities. Silvergate’s stock eventually cratered, wiping out billions in market value for investors.”
Silvergate Capital did not admit or deny the SEC’s allegations relating to reporting, internal accounting controls, and books-and-records provisions. It agreed to a $50 million civil money penalty along with a permanent injunction; the dollar amount is offset by a $20 million California DFPI penalty and a $43 million Federal Reserve Board assessment.
Lane, who had been with La Jolla, California-based Silvergate since 2008, and Fraher, who since 2006 had also served as Bank Secrecy Act (BSA) compliance officer and chief operating officer, settled individually with the SEC. Without admitting or denying allegations, they agreed to permanent injunctions and are barred from officer and director positions for five years.
Antonio Martino, chief financial officer of the bank and holding company from 2019 to 2023, was accused in part of making false and misleading statements about earnings. Now serving as CFO of healthcare-focused fintech PayZen, Martino did not settle and vowed to contest the SEC’s charges.
Lane’s $1 million penalty and Fraher’s $250,000 are not the heaviest civil regulatory fines for bank executives in comparable positions. In 2020, the Office of the Comptroller of the Currency sought in the wake of Wells Fargo Bank’s unauthorized-account-opening scandal $17.5 million from John Stumpf (formerly chairman and CEO), $25 million from Carrie Tolstedt (head of the community bank), $5 million from Claudia Russ Anderson (community bank CRO) and $1.25 million from Michael Loughlin (Wells Fargo & Co. CRO).
The SEC’s legal complaint details how Silvergate pivoted in 2013 from community banking and real estate lending toward servicing crypto-asset companies. Balance-sheet assets stood at $1 billion in 2017 when the bank introduced the Silvergate Exchange Network (SEN), described in an S-1 IPO filing as “a network of digital currency exchanges and digital currency investors that enables the efficient movement of U.S. dollars between SEN participants 24 hours a day, 7 days a week, 365 days a year.”
In 2021 alone, according to the court document, $787.4 billion in U.S. dollar transfers occurred on the SEN. “Between April 2021 and September 2022, Silvergate processed over 400,000 SEN transactions, totaling more than $1 trillion of activity.”
Silvergate, whose assets would peak at $16 billion, reported a $1 billion loss for the fourth quarter of 2022. On December 5, CEO Lane had issued an open letter “to set the record straight about Silvergate’s role in the digital asset ecosystem and what we have always done, and continue to do, to ensure our customers act in accordance with our robust risk management controls.”
A month after that, on January 5, 2023, the company disclosed a $718 million loss to cover $8.1 billion in withdrawals as the crypto market reeled from the bankruptcy of FTX, one of Silvergate’s biggest customers and SEN participants.
On the Silvergate website, according to the SEC, the bank advertised a testimonial from the now-jailed FTX founder Bankman-Fried: “Life as a crypto firm can be divided up into before Silvergate and after Silvergate – it’s hard to overstate how much it revolutionized banking for blockchain companies.”
Ex-CEO Alan Lane defended the bank’s risk management.
The SEC said that when FTX collapsed in November 2022, Lane told public relations staff that he wanted to “get out in front of the ‘negative news from ongoing FTX contagion,’” and he passed to CRO Fraher a board member’s request for a review of the bank’s FTX relationship.
Fraher was said to have already ordered a “forensic of FTX,” and by November 17 (FTX closed down on the 11th), the BSA staff “had completed an analysis and identified as suspicious over 300 transactions by FTX-related entities in Silvergate accounts from January 2022 until November 2022.” Those entities “had engaged in roughly $9 billion in suspicious transfers, some of which occurred over the SEN.”
Under fire from members of the U.S. Senate seeking details of the ties between Silvergate and FTX, Lane mentioned in his December 2022 letter the “extensive due diligence” conducted on FTX and related entities including Alameda Research. “Individuals or entities engaging in OTC trades with Alameda,” he said, “would have been instructed by Alameda to send funds to Alameda’s account whether at Silvergate or any of their other banking partners . . . And, as I’ve noted previously, if we detect activity that is unexpected or potentially concerning in any account, we conduct an investigation and, when required, confidentially file a suspicious activity report in accordance with federal regulation.”
In the March 8, 2023, announcement of its intention to liquidate the bank, Silvergate Capital said that Strategic Risk Associates was “providing transition project management assistance.” Silvergate Capital was an investor in that firm through the EJF Silvergate Ventures Fund. The SRA Watchtower software-as-a-service business became separate from SRA Consulting in 2023.
The SEC found statements by Lane in November and December, “with assistance from Fraher” and including the one on December 5, to be false and misleading in their attempt to assuage depositor and investor concerns.
Lane was held to account for “false or misleading” statements in a November 2022 SEC Form 10-Q “in light of: (1) the inadequacy of Silvergate’s BSA compliance program for its unique risk profile; and (2) Silvergate’s defining financial services product – the SEN – having been operating without automated monitoring for a period of at least 15 months,” as had been acknowledged by the bank’s BSA staff.
Just a few days before FTX went under, Lane was quoted in a press release announcing Fraher’s appointment as CRO: “Serving the digital asset industry requires that we continue to innovate and deliver products requested by our customers while maintaining strict risk management practices. We’ve always approached this opportunity with prudence, and a great deal of our success over the past nine years is attributed to [Fraher, president Ben Reynolds] and the teams they have led.”
The Fed and DFPI orders centered on transaction-monitoring and BSA/AML.
“An investigation by the Board of Governors identified deficiencies in Silvergate’s monitoring of internal transactions through the SEN,” said the central bank. It noted that “Silvergate has taken appropriate steps to liquidate and wind down the operations of the bank in an orderly manner, has repaid all of its deposit liabilities (other than certain de minimis balances), and does not anticipate any impact on or access to the Deposit Insurance Fund.”
The state regulator similarly referred to the SEN, adding, “An investigation by the department identified deficiencies with respect to Silvergate’s monitoring of internal transactions.”
“The DFPI holds all its licensees accountable for effective internal monitoring, which is critical in detecting fraud and ensuring compliance with California and federal banking laws,” said DFPI Commissioner Clothilde Hewlett. The coordinated settlement “is not only a significant win for the state, but, most importantly, for consumer protection and maintaining a trusted financial marketplace in California. But this isn’t over – DFPI will continue exploring options for making these funds available to consumers harmed by fraudulent and deceptive acts involving crypto assets.”