Silvergate Capital recently found itself embroiled in a legal battle with the Securities and Exchange Commission (SEC), resulting in a hefty settlement of $50 million. The SEC alleged that Silvergate Capital, along with its subsidiary Silvergate Bank, and two executives, engaged in misleading investors regarding the adequacy of its BSA/AML compliance program. Furthermore, the SEC claimed that the company failed to properly monitor customer transactions, particularly those involving crypto customers, such as the exchange FTX.
The Securities and Exchange Commission pointed out that Silvergate’s automated monitoring system failed to keep track of over $1 trillion worth of customer transactions on the Silvergate Exchange Network (SEN). The alleged misconduct occurred between November 2022 and January 2023, leading to severe consequences for the parties involved. Former Silvergate CEO Alan Lane faced a $1 million civil penalty, while former Chief Risk Officer Kathleen Fraher received a $250,000 civil penalty. Additionally, both executives agreed to five-year officer-and-director bars as part of the settlement.
In addition to the SEC’s enforcement action, the Federal Reserve Board of Governors and the California Department of Financial Protection and Innovation (DFPI) initiated parallel actions against Silvergate Capital. Both regulatory bodies are seeking a combined $63 million in fines, further adding to the financial woes of the company. These actions were not limited to Silvergate’s dealings with FTX but encompassed broader concerns related to its management of crypto assets and monitoring practices.
While the settlements between Silvergate Capital, its executives, and the regulatory authorities do not entail an admission of wrongdoing, they carry significant financial penalties and restrictions on future business activities. The parties involved must await court approval for the settlements to take effect. Moreover, the SEC’s allegations against Silvergate’s former CFO, Antonio Martino, highlight the extent of the legal troubles facing the company, with potential violations of federal securities laws at play.
Despite the staggering $50 million settlement with the SEC, Silvergate Capital may have the option to offset this amount by paying the fines imposed by the Federal Reserve and DFPI. However, the overall impact of these regulatory actions, combined with the reputational damage caused by the misconduct allegations, may have contributed to Silvergate’s decision to cease operations in March 2023. The downfall of Silvergate Capital serves as a cautionary tale for financial institutions, underscoring the importance of regulatory compliance and transparent communication with investors.