Fed drops enforcement action against Silvergate

Silvergate has completed reimbursements and has shuts down its banking operations.

The Federal Reserve Board announced that it’s dropping all enforcement action against Silvergate Bank and Silvergate Capital Corporation. This decision comes after Silvergate successfully wound down operations, reimbursed customers, and ceased its banking activities.

However, the regulatory challenges for Silvergate hasn’t ceased altogether. While the Fed may be stepping back on the banking entity, the SEC still has an ongoing suit against the latter for alleged complicity with the FTX fraud.

From turmoil to collapse

Silvergate’s fall from grace began in March 2023, amid the broader crypto market turmoil triggered by the collapse of FTX. Once a cornerstone of crypto banking, Silvergate found itself in dire straits. In February 2023, its stock became Wall Street’s second-most shorted, with 72% of shares borrowed for short positions. The delayed release of its annual 10-K form only exacerbated investor concerns, causing a 31% plunge in stock value.

Despite the Federal Reserve’s oversight of the liquidation process, some injured parties remained unsatisfied and pursued legal action. The departure of CEO Alan Lane and other top executives in August 2023 added another layer of complexity to Silvergate’s troubles.

Now, the SEC has thrown its hat into the ring with a lawsuit that paints a damning picture of Silvergate’s practices. The regulator alleges that Silvergate defrauded investors by misrepresenting its anti-money laundering controls and misleading them about the impact of the FTX collapse.

SSilvergate was complicit with the FTX collapse: SEC

According to the SEC’s complaint, Silvergate failed to adequately monitor approximately $1 trillion in transactions and overlooked nearly $9 billion in suspicious transfers by FTX entities. These are not small numbers, even by Wall Street standards.

In response, Silvergate agreed to a $50 million settlement with the SEC, neither admitting nor denying the allegations. CEO Alan Lane and Chief Risk Officer Kathleen Fraher also settled for $1 million and $250,000 respectively. But the story doesn’t end there.

The SEC’s allegations extend to Silvergate’s C-suite, with CFO Antonio Martino accused of engaging in a fraudulent scheme to mislead investors about the bank’s dire financial condition. Martino’s camp has vehemently denied these allegations, setting the stage for a potential courtroom showdown.

At the heart of the controversy is Silvergate’s SEN network, once touted as the bank’s crown jewel. This 24/7 transaction highway for crypto giants like Circle and Gemini allegedly operated without adequate monitoring for suspicious activities for at least 15 months prior to November 2022.

While the Fed may have closed its book on Silvergate, the SEC’s actions suggest that the regulatory scrutiny of crypto-related financial institutions is far from over.