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Earlier this month, the SEC charged Silvergate Capital Corporation, its former CEO, and its former CRO for misleading investors about the strength of the firm’s Bank Secrecy Act / Anti-Money Laundering compliance program. While we wait for a clear plan of action on crypto from the regulator, cases like this serve as a warning that firms in this space cannot sit idly by when it comes to compliance.
It was also accused of monitoring of crypto customers, including FTX, by Silvergate’s wholly owned subsidiary, Silvergate Bank. Additionally, the Firm’s CFO was charged with misleading investors about the company’s losses from expected securities sales following FTX’s collapse.
This was clearly a widespread issue that affected multiple facets of Silvergate’s business, stemming from the firm’s relationship with crypto. On the Bank Secrecy Act / Anti-Money Launder (BSA / AML) side, while Silvergate alleged to have an effective monitoring program for its high-risk crypto customers, their system failed to monitor over $1 trillion of transactions by customers on the bank’s payments platform. To make matters worse, the SEC complaint then alleges that the CFO misrepresented the company’s bleak financial condition following the collapse of FTX. The SEC claims that, in an earnings release and earnings call, Silvergate’s losses were understated and the firm misrepresented that it remained well-capitalized as of the end of 2022. By March of 2023, Silvergate announced it would wind down its banking operations and its stock would plummet to near $0.
This is an important case to pay attention to on two levels. While we are still waiting for clearer guidance from the regulator on how it plans to monitor firms in the crypto space, it’s clear firms in the space are still a priority for their reviews with the regulator looking to make examples.
Additionally, at a firm level, while the crash of FTX affected many other organizations, it seems clear that there was a coordination from the Silvergate senior leadership to hide just how much the downfall of one of the largest crypto exchanges impacted their firm. The alleged misrepresentation of firm financials is a blatant attempt to hide the impact of the downfall from investors. We do not have more information on exactly how aware Silvergate was of the ineffectiveness of its BSA / AML monitoring program. At best, it is gross negligence, but more than likely this was another intentional attempt to cover up the failures of the firm.
Without admitting or denying the allegations, Silvergate agreed to pay a $50 million civil penalty and imposed a permanent injunction to settle the charges. The CEO and CRO also settled the charges without admitting or denying the allegations, and agreed to permanent injunctions, five-year officer-and-director bars, and civil penalties of $1 million and $250,000 respectively.
We use this case as a cautionary tale to remind firms of the importance of prioritizing the compliance function at your organization. Even without details of the CCO’s involvement in the above issues, it’s clear the organization did not take compliance seriously and wasn’t aware of, or ignored, the ramifications. The consequences may have been far less severe if the firm had put in place a more effective compliance program and been more upfront about its issues. This case will now follow those related to the organization for the rest of their careers.
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