SEC Sues Silvergate for Its Alleged Role in FTX Fraud

The SEC filed a lawsuit against Silvergate Capital Corporation, which is the parent company behind a crypto-friendly bank that has been accused of helping facilitate fraud for the FTX exchange.

The US SEC has filed a lawsuit against Silvergate Capital Corporation which allegedly helped facilitate fraud at the defunct exchange FTX. The lawsuit accused the company and its executives of misleading investors about its compliance program and monitoring of crypto customers. On the other hand, Coinbase is suing the SEC and FDIC for failing to provide documents clarifying the regulators' stance on cryptocurrencies. Meanwhile, recent Supreme Court rulings are challenging the SEC's authority, while Nigeria's SEC is pushing for improved crypto regulations to benefit the country's unbanked population.

SEC Targets Silvergate

The United States Securities and Exchange Commission (SEC) has filed a lawsuit against Silvergate Capital Corporation, the parent company of a crypto-friendly bank that allegedly helped facilitate fraud at the defunct exchange FTX. In a July 1 filing in the U.S. District Court for the Southern District of New York, the SEC accused Silvergate, former CEO Alan Lane, and former Chief Risk Officer Kathleen Fraher of misleading investors about the robustness of its Bank Secrecy Act/Anti-Money Laundering compliance program and the monitoring of crypto customers like FTX. 

The regulator also charged former Silvergate Chief Financial Officer Antonio Martino with misleading investors about the company’s losses from expected securities sales after FTX’s collapse. Everyone except Martino has agreed to settle with the SEC. Martino believes that the allegations are unfounded and he looks forward to clearing his name in court, according to a statement from his attorneys at law firm Linklaters. 

SEC enforcement director Gurbir Grewal alleged that Silvergate failed to detect almost $9 billion in suspicious transfers between FTX and its related entities, which caused massive losses for investors. He claimed that the firm and its executives also continued to mislead investors after FTX’s collapse from November 2022 to January 2023.

Silvergate agreed to pay a $50 million civil penalty without admitting or denying the allegations, while Lane and Fraher agreed to pay $1 million and $250,000, respectively. These settlements are still subject to court approval. 

The SEC's decision to file a lawsuit coincided with a settlement between Silvergate and the Board of Governors of the Federal Reserve System and the California Department of Financial Protection and Innovation. Silvergate voluntarily liquidated in March of 2023 after several crypto firms announced their intention to sever ties with the bank because of its alleged links to FTX.

FTX  collapsed and filed for bankruptcy in November of 2022, which resulted in criminal charges against several executives, including former CEO Sam Bankman-Fried, who is currently serving a 25-year sentence in federal prison. 

The SEC's complaint stated that under Bankman-Fried, FTX directed customers to wire money to Alameda’s account with Silvergate in exchange for assets on the crypto exchange. Bankman-Fried previously provided a testimonial on the bank’s website, claiming it revolutionized banking for blockchain companies.

Additionally, a judge recently signed off on a class-action lawsuit filed by FTX users against Silvergate, alleging that the bank was aware of the fraudulent activity at the exchange. Silvergate denied these allegations.

Coinbase Sues SEC

A research firm contracted by Coinbase is suing the SEC and a federal banking agency, accusing them of failing to produce documents under open-records laws that would clarify the regulators' stance on cryptocurrencies. History Associates Inc., acting on behalf of Coinbase, claims the SEC and the Federal Deposit Insurance Corp. (FDIC) improperly denied access to documents that should be available under the Freedom of Information Act (FOIA). 

Coinbase is asking for written communications in three closed cases to understand how the agency actually determined which digital assets qualify as securities, including Ethereum (ETH). From the FDIC, Coinbase wants copies of "pause letters" that were sent to financial firms advising them to stop crypto activities.

This legal challenge comes shortly after the SEC reportedly closed its review of "Ethereum 2.0" as a potential security, which could complicate the SEC's rejection of document requests related to ETH. 

Additionally, Coinbase is also asking for documents from two settled digital assets cases, one involving EtherDelta founder Zachary Coburn and another focusing on blockchain startup Enigma MPC. In 2018, the SEC deemed EtherDelta's ETH transactions as "digital asset securities," and in 2017, it ruled that Enigma MPC's $45 million sale of ENG tokens were unregistered securities.

Coinbase Chief Legal Officer Paul Grewal stated that the requests for documents on closed investigations were made to reveal how the SEC sees its authority over digital assets. The SEC has denied these requests under FOIA's "exemption 7A," which protects information that could undermine law enforcement efforts. Spokespeople for the SEC and FDIC declined to make any comments on the lawsuits.

History Associates' suit against the FDIC argues that the pause letters are part of an effort by financial regulators to pressure institutions to cut ties with digital-asset firms. These lawsuits add to the ongoing legal conflicts between Coinbase and U.S. financial regulators. Coinbase is currently engaged in a high-profile court battle with the SEC over allegations that it operates an illegal exchange trading unregistered securities. The exchange has also sued the SEC to compel the regulator to issue guidance on defining digital asset securities.

In 2022, Coinbase also funded a lawsuit against the U.S. Treasury Department over its sanctions against crypto mixer Tornado Cash, although the suit was ultimately unsuccessful.

SCOTUS Rulings Challenge SEC Authority

In the past week, the Supreme Court of the United States (SCOTUS) released two opinions with major implications for the SEC and its enforcement actions against companies and crypto firms. On June 27, in a 6-3 decision in SEC v. Jarksey, the court ruled that defendants in an SEC civil case concerning securities fraud are entitled to a jury trial instead of adjudication by an administrative law judge. The majority opinion compared an SEC civil case involving securities fraud to a criminal case involving fraud.

After this, on June 28, SCOTUS issued an opinion in Loper Bright Enterprises v. Raimondo, overturning the 1984 Chevron deference doctrine. This decision requires lower courts to independently determine if an agency acted within its statutory authority without deferring to the agency’s interpretation of the law. Although not explicitly mentioning the SEC, this ruling directly impacts regulatory bodies like the SEC.

Sheila Warren, the CEO of the Crypto Council for Innovation, stated that these decisions directly affect the crypto industry by questioning the regulatory reach of agencies like the SEC. She believes that the Supreme Court's decisions will limit regulatory overreach, which has hindered crypto innovation in the U.S. for a while now.

Justice Sonia Sotomayor, dissenting in the SEC v. Jarksey case, called the majority opinion a "power grab" over U.S. Congress policymaking. Justice Elena Kagan, dissenting in the Loper decision, criticized the majority for reversing "settled law" and overhauling a key aspect of administrative law. Joseph Lynyak of Dorsey & Whitney warned that overturning the Chevron doctrine could lead to an overwhelmed court system.

Representative Maxine Waters also criticized the Supreme Court’s decisions, and claimed that they benefit wealthy corporations at the expense of ordinary people and allow them to evade civil penalties.

Nigerian SEC Pushes for Improved Crypto Regulations

Meanwhile, the Director General of Nigeria's SEC, Emomotimi Agama, recently pointed out the potential of cryptocurrency to benefit the country’s unbanked population. Speaking at the 2024 Annual Conference of the Association of Capital Market Academics of Nigeria, Agama predicted that Nigeria’s crypto market could reach $52.5 million by 2028.

Agama also stated that around 33.4% of Nigerians own or use cryptocurrencies, which presents an opportunity to extend financial services to the over 38 million unbanked adults in the country. He talked about the accessibility of cryptocurrencies for those without traditional bank accounts, and pointed out that many Nigerians have crypto wallets instead. Additionally, Agama believes that cryptocurrencies could reduce remittance costs, making it easier and cheaper for Nigerians in the diaspora to send money home. 

Despite the benefits, Agama also acknowledged the challenges of cryptocurrency use, including regulatory uncertainty, security concerns, and financial literacy issues. He stressed the need for a balanced regulatory approach to harness the benefits of crypto assets while mitigating risks. Agama called for a clear regulatory framework, improved cybersecurity measures, and financial education to protect investors and promote a healthy digital asset market.

In April, Nigerian President Bola Ahmed Tinubu appointed Agama as the new head of the SEC. Agama, who was the former managing director of the Nigerian Capital Market Institute, soon oversaw the introduction of an amendment to the initial Rules on Digital Assets Issuance, Offering Platforms, Exchange, and Custody. This program is designed for virtual assets service providers to align with the new regulatory requirements.