SEC Files Lawsuit Against Silvergate Capital Over Alleged FTX Fraud

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The United States Securities and Exchange Commission (SEC) has initiated legal action against Silvergate Capital Corporation, the parent company of a crypto-friendly bank accused of facilitating fraud at the now-defunct exchange FTX. The lawsuit, filed on July 1 in the U.S. District Court for the Southern District of New York, also targets former Silvergate executives Alan Lane, Kathleen Fraher, and Antonio Martino.

Silvergate Duped Investors?

According to the SEC, Silvergate and its executives misled investors about the robustness of its Bank Secrecy Act/Anti-Money Laundering compliance program and failed to properly monitor crypto customers like FTX. The complaint specifically accuses former Chief Financial Officer Antonio Martino of deceiving investors about the company’s losses stemming from expected securities sales following FTX’s collapse. Notably, Martino has chosen to contest the charges, declaring the allegations unfounded and expressing confidence in clearing his name in court.

Gurbir Grewal, SEC enforcement director, stated that Silvergate failed to detect nearly $9 billion in suspicious transfers between FTX and its related entities, leading to significant investor losses. He further alleged that the company and its executives misled investors during the aftermath of FTX’s collapse from November 2022 to January 2023.

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The Settlement Proposal: Insight

In the proposed settlement, Silvergate has agreed to a $50 million civil penalty, while Lane and Fraher have agreed to pay $1 million and $250,000, respectively. These settlements, subject to court approval, come alongside a separate agreement between Silvergate and both the Federal Reserve Board of Governors and the California Department of Financial Protection and Innovation.

Silvergate decided to liquidate voluntarily in March 2023 after several crypto firms severed ties with the bank, citing its connections to FTX. FTX itself collapsed and filed for bankruptcy in November 2022, leading to criminal charges against several executives, including former CEO Sam Bankman-Fried, who is now serving a 25-year federal prison sentence.

Billionaire is Now a Convict

The SEC’s complaint highlighted that under Bankman-Fried’s direction, FTX customers were instructed to wire funds to Alameda’s account with Silvergate in exchange for assets on the exchange. Bankman-Fried had previously praised Silvergate on the bank’s website, stating it had revolutionized banking for blockchain companies.

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Additionally, the SEC’s action follows the approval of a class-action lawsuit filed by FTX users against Silvergate, alleging the bank was aware of fraudulent activities at the crypto exchange. Silvergate has denied these allegations.

This legal move by the SEC coincides with recent U.S. Supreme Court decisions that could influence the handling of crypto enforcement cases. One ruling asserts that defendants in SEC civil cases involving securities fraud are entitled to a jury trial, potentially impacting future proceedings.

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