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Silvergate Knew More About FTX Woes Than It Is Saying, US Senators Say

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Silvergate Pulls $8 Billion in Funds - What Does It Mean For You
Silvergate Pulls $8 Billion in Funds - What Does It Mean For You

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A group of US senators is seeking new details from Silvergate Capital Corp about its knowledge of FTX’s alleged misuse of customer funds. In a letter directed to Silvergate CEO Alan Lane, the lawmakers alleged that the company failed to fully respond to questions about the firm’s ties to the collapsed crypto exchange when approached on December 5.

The senators involved in the inquiry include a renowned cryptocurrency critic, Elizabeth Warren (D-Mass), and Republicans Roger Marshall (R-Kansas) and John Kennedy (R-La).

In the letter, the lawmakers stipulated:

We are dismayed by your evasive and incomplete response to our December 5 2022 letter, concerning Silvergate’s role in the improper transfer of FTX user funds to Alameda Research. We wrote seeking information on what seemed to be an egregious fiasco of your bank’s responsibilities to keep in check and report suspicious financial activities.

Further, the Senators asserted that both Congress and the public deserve the necessary information to understand the role of Silvergate in FTX’s fraudulent downfall. The fact that Silvergate rolled to the Federal Home Loan Bank as its banker of last resort in 2022, the lawmakers alleged that it is simply not an acceptable rationale, and the company should provide answers.

The former FTX founder, Sam Bankman-Fried, and other high-level executives, such as FTX co-founder Gary Wang and Alameda Research CEO, Caroline Ellison, were accused of conducting a fraudulent scheme. The scheme involved comingling billions of dollars of FTX customer funds and its affiliated hedge fund, Alameda Research.

It is alleged that the assets were deposited into a Silvergate account of an Alameda subordinate referred to as North Dimension, according to a Securities and Exchange Commission. Reportedly, the FTX users were asked to wire funds to North Dimension, a fake electronics retailer, to conceal the fact that the funds were used for Alameda’s investments.

Silvergate platform previously declined to respond to FTX-related questions asked by the lawmakers, citing restrictions on “disclosing confidential supervisory information,” according to the letter.

However, the former chief innovation officer for Federal Deposit Insurance, Sultan Meghji, asserted via Twitter that banks couldn’t disclose confidential supervisory information. In some cases, they could be held liable for criminal offenses if they do- even if asked by Congress. Meghji further stipulated that:

It is not surprising that the platform ( or any other bank) would use those regulations to avoid responding to a Congress questionnaire. Congress should work together with the banking regulators to acquire that information.

Silvergate Under Pressure

Silvergate has been under increasing pressure in recent months. In early January, Silvergate disclosed that it had $4.3 billion in Federal Home Loan Bank short-term advances and about $4.6 billion in cash and cash equivalents at the end of 2022. John Stark, consulting LLC revealed via Twitter that the funding enabled the company to stave off a run on deposits after FTX’s demise. Silvergate was among several crypto-friendly banks that depended on the program initially set under President Herbert Hoover to bolter mortgage lending.

Additionally, a class-action suit was filed against Silvergate on December 14 over its alleged role of transferring FTX customer funds to the trading firm Alameda Research. The class-action was filed on behalf of all purchasers of Silvergate securities, in which Lane and the chief financial officer, Antonio Martino, were listed as defendants.

 Missing Details 

Silvergate responded to the senators’ original letter in December stipulating that Alameda opened an account with the firm in 2018, before the founding of the exchange company, FTX. The bank further noted that it is reviewing transactions associated with FTX and Alameda accounts.

In December, Lane asserted that Silvergate carried out significant due diligence on the crypto exchange and its related entities during the onboarding process and through ongoing monitoring.

In the latest letter, the US senators blamed Silvergate for secluding essential information needed by Congress to assess the extent to which the platform is accountable for the improper transfer of FTX customer funds to Alameda.” The senators also alleged that they needed to determine any non-compliance issues by the bank or auditors that could have led to the claimed fraud.

In the new round of inquiries, the senators have asked Silvergate to answer a series of questions. Some inquiries include whether the bank knew FTX was directing its users to wire funds to Alameda’s accounts at Silvergate. Another inquiry is whether it suspected any transactions to be suspicious.

The senators further requested details on the company’s due diligence practices, how it plans to utilize the proceeds from its FHLB loan, and results of the reviews carried out by the Fed and independent auditors. However, Silvergate has until February 13 to respond to the inquiries.

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