Securities Class Action Alleges Silvergate Capital Corp. Concealed Involvement in Money Laundering Operation from Investors

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A proposed class action alleges Silvergate Capital Corporation and its executives have harmed investors financially by failing to disclose that the company was likely to face penalties and reputational harm due to its involvement in a $425 million money laundering operation.

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The 29-page lawsuit claims that between November 2021 and January 2023, the digital currency company, which operates the Silvergate Exchange Network and Silvergate Bank, and CEO Alan J. Lane and CFO Antonio Martino misled investors by “knowingly or recklessly” issuing positive statements about Silvergate’s compliance with regulations regarding money laundering. However, Silvergate failed to detect, or actively concealed, that customers were using its banking services to launder millions of dollars, the case argues.

According to the case, investors relying on Silvergate’s misrepresentations were unaware that they were purchasing its securities at artificially inflated prices and that the stock’s value would drop dramatically after the company’s alleged misconduct was revealed.

On November 9, 2021, Silvergate allegedly filed its first misleading report with the U.S. Securities and Exchange Commission (SEC), stating that “the Company’s disclosure controls and procedures were effective as of September 30, 2021.”

The complaint goes on to explain that in a Form 10-K statement filed in February of last year, Silvergate acknowledged that consumers may use digital currency to engage in illegal transactions, “such as fraud, money laundering, tax evasion and ransomware scams.” It also acknowledged that the company would be at risk of penalization if it failed to comply with certain banking regulations that require financial institutions to maintain an effective anti-money laundering program and appropriately file suspicious activity and currency transaction reports, the case says.

To combat these risks, Silvergate said that it had implemented “enhanced” policies and procedures, including anti-money laundering and customer identification programs, to detect and prevent illegal transactions, the suit states.

“We believe these enhanced procedures adequately screen and monitor our customers associated with the digital currency initiative for their compliance with anti-money laundering laws,” Silvergate’s report reads.

Three more quarterly reports, filed in May, August and November 2022, reaffirmed statements from the 2021 10-K publicizing the company’s compliance with regulatory requirements.

However, a November 15 tweet by Marcus Aurelius Research exposed that the company had not been performing its self-described “extensive regulatory compliance diligence,” the case relays. According to the tweet:

The tweet included a link to an August 2022 forfeiture application for probable cause filed in Broward County, Florida that connected Silvergate to the money laundering operation, the complaint says. Per the suit, Silvergate’s stock price fell 17 percent the day this news was tweeted.

Two days later, the Bear Cave newsletter published an article that drew attention to potential violations of Silvergate’s anti-nepotism policy and its involvement with FTX, a cryptocurrency exchange and alleged Ponzi scheme that collapsed in November last year, the case relays. The filing reports that Silvergate’s stock price dropped 10.7 percent the following day.

Then, on January 5, 2023, Silvergate’s stock price tanked 42.73 percent after it issued a press release disclosing that total deposits from digital asset customers had declined 68 percent, the case states.

“That same day, The Wall Street Journal released an article titled ‘Silvergate’s Deposit Run is Worse Than Great Depression-Era Runs’ in which it noted that bank runs from 1930-1933 averaged deposit declines of nearly 38%, and that only a few (9 out of a sample size of 67) had deposit declines exceeding 50%,” the filing reads. “It further noted that during the 2008 crisis, deposit losses were substantially smaller than the losses faced by Silvergate.”

The lawsuit looks to cover anyone who purchased or otherwise acquired Silvergate securities between November 9, 2021 and January 5, 2023 and were damaged thereby.

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