Author: Nikhilesh De, Jesse Hamilton, CoinDesk; Translated by: Deng Tong, Golden Finance

• Silvergate Bank’s parent company settled with the Securities and Exchange Commission, the Federal Reserve and the California Department of Financial Protection and Innovation over allegations that it failed to maintain an adequate anti-money laundering program and made misleading disclosures about the effectiveness of that program.

• The SEC also charged former Silvergate executives. Former CEO Alan Lane and former COO Kathleen Fraher agreed to settle, while former CFO Antonio Martino denied the allegations.

Silvergate Capital Corp., the parent of a cryptocurrency-friendly bank whose 2023 collapse exacerbated the industry’s banking crisis, has agreed to pay $63 million to settle charges by U.S. and California regulators over internal management failures and poor disclosures to investors.

The U.S. Securities and Exchange Commission (SEC) on Monday sued Silvergate Capital Corporation, the parent company of crypto-friendly Silvergate Bank, as well as former CEO Alan Lane, former COO Kathleen Fraher, and former CFO Antonio Martino, alleging that the bank misled the public and shareholders by stating that it had an effective Bank Secrecy Act/anti-money laundering program when it did not. The Federal Reserve and California’s Department of Financial Protection and Innovation (DFPI) have also filed similar charges against the La Jolla, California-based bank.

Silvergate, Lane and Fraher agreed to a settlement in which they neither admitted nor denied the SEC’s allegations but will pay a fine and agree to be barred from serving as an officer or director of another public company for five years. Silvergate also reached a settlement with the Federal Reserve and DFPI.

Silvergate’s fine includes $43 million from the Federal Reserve and $20 million from California regulators, who also cited deficiencies in the bank’s tracking of internal transactions. The SEC also fined it $50 million, but is not expected to increase the total fine. The settlement is subject to court approval, and the SEC said in its press release that any fine owed to it may be offset by any amount Silvergate pays to bank regulators.

Former CFO Martino denied the allegations through a statement from his attorney, saying they related to one quarter in 2022 and were related to “judgment-driven” decisions.

“Lane and Fraher, and through them SCC, were repeatedly aware that the Bank’s BSA/AML compliance program was seriously deficient prior to November 2022,” the complaint states. “In addition, Lane and Fraher should have known that the Bank’s BSA/AML compliance program was seriously deficient as a result of multiple examinations of Silvergate conducted by the Federal Reserve through the Federal Reserve Bank of San Francisco (FRBSF).”

As part of its complaint, the SEC alleges Silvergate failed to detect nearly $9 billion in suspicious transfers from major client FTX, which filed for bankruptcy in November 2022.

“For much of 2021 and 2022, the Bank failed to conduct adequate automated monitoring of its primary product, the Silvergate Exchange Network (SEN),” the complaint states. “The SEN was the Bank’s key mechanism for moving funds between its crypto-asset clients and was specifically tailored to attract crypto-asset clients. But the Bank failed to adequately or automatically monitor the approximately $1 trillion in bank transactions that occurred on the SEN for suspicious activity.”

The lawsuit alleges that Silvergate’s team got word from government reviewers that its efforts were inadequate, but it still claimed there were no risk factors in its quarterly or annual reports (Forms 10-Q and 10-K).

The 2021 quarterly filing did “acknowledge” that the bank faced “high risk” due to some of its crypto clients, but the bank did not disclose that its executives were aware of specific deficiencies related to its compliance with the Bank Secrecy Act.

A Silvergate spokesperson told CoinDesk the settlement is part of the bank’s ongoing efforts.

"In early March 2023, Silvergate made the responsible decision to voluntarily liquidate without government assistance. As of November 2023, all deposits had been repaid to the bank's customers, and Silvergate ceased banking operations shortly thereafter. The settlement announced today will facilitate Silvergate's surrender of its banking license as part of the bank's continued orderly wind-down and successful conclusion of the Federal Reserve, DFPI and SEC investigations," the spokesperson said in an emailed statement.

Voluntary Liquidation

Silvergate, once the bank of choice for big cryptocurrency businesses, voluntarily liquidated under the weight of huge industry headwinds, becoming the first of three tech lenders to fail during the so-called crypto winter. While the other two — Silicon Valley Bank and Signature Bank — were seized and liquidated by U.S. authorities, Silvergate collapsed on its own without government intervention or need for federal help to repay depositors.

The collapse of Silvergate and two other institutions triggered months of chaos in the U.S. banking industry, and digital asset companies scrambled for hard-to-find financial partners as cryptocurrencies fell further out of favor.

Silvergate’s meteoric rise from a small community bank to a major financial partner in the digital asset industry has been even faster than its fall. The bankruptcy is tied to a March 2023 securities filing that revealed the company was betting its future on the cryptocurrency industry, accelerating the sale of securities to raise cash to repay advances from the Federal Home Loan Bank of San Francisco. But warning signs were already there before that, as the institution lost more than $8 billion in cryptocurrency customer deposits in the final months of 2022.

The Federal Reserve’s inspector general concluded in an October 2023 report that Silvergate’s management was “ineffective” and that supervisors from federal regulators failed to adapt to the business’s evolution.