Silvergate Capital recently settled with the Securities and Exchange Commission (SEC) for $50 million, while facing demands from Federal Reserve governors and California financial regulators for an additional $63 million in fines. This settlement came as a response to claims that the company, along with its subsidiary Silvergate Bank and two executives, misled investors about the strength of its BSA/AML compliance program and the monitoring of crypto customers, including the exchange FTX.
Alleged Wrongdoing and Failure of Monitoring System
The SEC alleged that Silvergate Capital’s automated monitoring system failed to monitor over $1 trillion of customer transactions on the Silvergate Exchange Network (SEN) between November 2022 and January 2023. This failure resulted in misleading investors about the company’s compliance with regulatory requirements and its ability to detect suspicious activities related to crypto transactions. Furthermore, the settlement with the SEC imposed a $1 million civil penalty on former CEO Alan Lane, a $250,000 civil penalty on former Chief Risk Officer Kathleen Fraher, and included permanent injunctions on the companies and executives involved.
It is worth noting that Silvergate, Lane, and Fraher settled with the SEC without admitting or denying the allegations brought against them. This raises questions about the transparency and accountability of the company and its executives in addressing the issues raised by regulators. Additionally, the agreement to five-year officer-and-director bars for Lane and Fraher suggests a lack of oversight and governance within the organization.
The SEC also alleged that Silvergate and its former CFO, Antonio Martino, misled investors about the company’s losses from expected securities sales following FTX’s collapse. Martino, who has not yet settled with the SEC, faces charges of violations of federal securities laws. This highlights a pattern of dishonesty and lack of transparency in the company’s financial reporting practices, which could have serious repercussions for investors and stakeholders.
Parallel Actions by Federal Reserve and DFPI
In addition to the SEC settlement, the Federal Reserve Board of Governors and the California Department of Financial Protection and Innovation (DFPI) announced parallel actions against Silvergate, seeking $63 million in fines. These actions raise concerns about the company’s overall compliance with regulatory requirements and its handling of crypto transactions. The fact that Silvergate can offset the $50 million owed to the SEC by paying the fines in the Federal Reserve and DFPI actions suggests a broader regulatory and oversight failure within the company.
Silvergate Capital’s $50 million settlement with the SEC, along with the demands for additional fines from other regulatory authorities, highlights serious concerns about the company’s compliance practices, governance structure, and transparency in financial reporting. The failure to admit or deny the allegations, misleading investors, and parallel regulatory actions all point to a systemic issue within the organization that requires immediate attention and corrective measures. Investors and stakeholders should closely monitor the developments in this case to assess the long-term impact on Silvergate Capital and its reputation in the financial industry.
