U.S. SECURITIES AND EXCHANGE COMMISSION

Litigation Release No. 26044 / July 2, 2024

Securities and Exchange Commission v. Silvergate Capital Corporation et al., No. 1:24-cv-04987 (S.D.N.Y. July 1, 2024)

SEC Charges Silvergate Capital, Former CEO for Misleading Investors about Compliance Program

Former Chief Risk Officer and former CFO also charged for misleading investors

The Securities and Exchange Commission charged Silvergate Capital Corporation, its former CEO Alan Lane, and former Chief Risk Officer (CRO) Kathleen Fraher with 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, by Silvergate's wholly owned subsidiary, Silvergate Bank. The SEC also charged Silvergate and its former Chief Financial Officer, Antonio Martino, with misleading investors about the company's losses from expected securities sales following FTX's collapse. All parties charged, aside from Martino, have agreed to settle the SEC's charges.

According to the SEC's complaint, from November 2022 to January 2023, Silvergate, Lane, and Fraher misled investors in stating that Silvergate had an effective BSA/AML compliance program and conducted ongoing monitoring of its high-risk crypto customers, including FTX, in part to rebut public speculation that FTX had used its accounts at Silvergate to facilitate FTX's misconduct. In reality, Silvergate's automated transaction monitoring system failed to monitor more than $1 trillion of transactions by its customers on the bank's payments platform, the Silvergate Exchange Network.

The SEC's complaint also alleges that Silvergate and Martino misrepresented the company's bleak financial condition during a liquidity crisis and bank run following FTX's collapse. The complaint alleges that Silvergate and Martino, in an earnings release and earnings call, understated Silvergate's losses from expected security sales and misrepresented that it remained well-capitalized as of December 31, 2022. In March 2023, Silvergate announced it would wind down its banking operations, and its stock eventually plummeted to near $0.

The SEC's complaint, filed in the U.S. District Court for the Southern District of New York, charges Silvergate and Lane with violating the antifraud provisions of Sections 17(a)(2) and (3) of the Securities Act of 1933. The complaint also charges Silvergate with violating Section 13(a) of the Exchange Act of 1934 and Rules 12b-20, 13a-1, 13a-11, and 13a-13 thereunder, as well as violating Sections 13(b)(2)(A) and Sections 13(b)(2)(B) of the Exchange Act. The complaint additionally charges Fraher with violating Section 17(a)(3) of the Securities Act.

Without admitting or denying the allegations, Silvergate agreed to a final judgment ordering it to pay a $50 million civil penalty and imposing a permanent injunction to settle the charges. Lane and Fraher also settled the charges without admitting or denying the allegations, agreeing to permanent injunctions, five-year officer-and-director bars, and to pay civil penalties of $1 million and $250,000, respectively. All the settlements are subject to court approval, and Silvergate's payment may be offset by penalties paid to the Board of Governors of the Federal Reserve System (FRB) and/or the California Department of Financial Protection and Innovation (DFPI).

The SEC charged Martino with violating Section 17(a) of the Securities Act and Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5 and 13b2-1 thereunder. The SEC's complaint further charges Martino with aiding and abetting Silvergate's violations of Section 17(a)(2) of the Securities Act and S Sections 10(b), 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 10b-5(b), 12b-20, and 13a-11 thereunder.

In parallel actions, FRB and DFPI announced settled charges against Silvergate.

The SEC's investigation was conducted by Elizabeth Goody, Michael Keating, Amy Mayer, Heidi Mitza, Pasha Salimi, Ivan Snyder, Katherine Stella, and Katherine Zucca, with assistance from Leigh Barrett and Margaret McGuire, and supervised by Mark R. Sylvester, Michael Brennan, and Jorge G. Tenreiro of the Crypto Assets and Cyber Unit. The litigation against Martino will be led by Hayden Brockett, Peter Mancuso, and Laura Meehan, and supervised by Jack Kaufman and Mr. Tenreiro.

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