A complaint filed by the Securities and Exchange Commission alleges that Silvergate Capital Corporation and three of its former executives misled investors.
The SEC alleges that Silvergate and its former CEO Alan Lane, and former chief risk officer Kathleen Fraher misled investors about the strength of its wholly owned subsidiary Silvergate Bank’s Bank Secrecy Act/Anti-Money Laundering compliance program and the monitoring of crypto customers, including the collapsed FTX.
The agency says that between November 2022 and January 2023, the firm’s automated system failed to monitor almost $1 trillion of transactions by its customers on the bank’s payments platform, the Silvergate Exchange Network. The firm, Lane, and Fraher assured investors that the system was robust, amid speculation about FTX’s use of Silvergate accounts in the collapsed crypto exchange’s misconduct.
“At all times, but especially during moments of crises, public companies and their officers must speak truthfully to the investing public. Here, we allege that Silvergate, Lane and Fraher fell not only woefully, but also fraudulently, short in that regard,” said Gurbir S. Grewal, Director of the SEC’s Division of Enforcement, who said that instead of acting as expected the firm and two executives “doubled down” on their misleading of investors.
In fact, because of those deficiencies, Silvergate allegedly failed to detect nearly $9 billion in suspicious transfers among FTX and its related entities. Silvergate’s stock eventually cratered, wiping out billions in market value for investors.”
The firm, Lane, and Fraher agreed to settle the SEC’s complaint 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 agreed to permanent injunctions, five-year officer-and-director bars, and civil penalties of $1 million and $250,000 respectively. All settlements are subject to court approval.
CFO DENIES ALLEGATIONS
Meanwhile, the agency also alleges that former chief financial officer Antonio Martino misled investors about the company’s losses from expected securities sales following FTX’s collapse.
The SEC claims 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.”
The firm eventually announced the winding down of its banking operations and its stock plummeted to near $0.
However, Martino does not accept the allegations and in a statement provided to InvestmentNews said: "I am deeply committed to the highest standards of integrity and transparency in financial reporting, as has been the case over the course of my 30+ year career. The allegations made by the SEC are unfounded and irresponsible, and I look forward to presenting my case in court and clearing my name."
Martino’s attorneys, Adam Lurie and Doug Davison of Linklaters LLP, said that the SEC is guilty of over-reach and is using the complexities of the accounting treatment of Other Than Temporary Impairment by Silvergate Capital Corporation for one quarter of 2022, when Mr. Martino was Silvergate’s CFO.
“Here, the SEC is inappropriately seeking, with the benefit of hindsight, to substitute its business judgment with decisions that Mr. Martino—a career finance professional—made in real time,” said Lurie. “Mr. Martino acted reasonably and in good faith throughout his time at Silvergate. He denies any wrongdoing and intends to challenge the SEC's claims in court.”
Davison added that they are confident that the jury will find that there is no case to answer
“Mr. Martino received no personal benefit from the conduct alleged by the SEC,” he said. “He did not receive a bonus in relation to the relevant period and he never sold any securities related to the company. He is a career financial professional whose leadership protected depositors and should be lauded.”
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