US prosecutors in the Justice Department’s fraud unit are investigating Silvergate Capital Corp.’s dealings with fallen crypto giants FTX and Alameda Research, according to people familiar with the matter.
The criminal investigation is looking into the hosting of Silvergate accounts linked to the businesses of Sam Bankman-Fried, said the people who asked not to be named discussing the confidential probe. The review adds to growing scrutiny of the La Jolla, California-based bank, which has also drawn the attention of lawmakers.
The crypto bank has not been charged with any wrongdoing and the investigation, which is in its early phases, could end without charges being filed.
Representatives for Silvergate and the Justice Department in Washington, where the investigation is taking place, declined to comment.
Shares of Silvergate fell more than 20% in extended trading on Thursday, erasing a 29% gain during regular market hours in New York.
Silvergate was among the lenders hardest hit by FTX’s sudden implosion last November. The bank reported a loss of $1 billion last quarter and fangry 40% of your staff. He also revealed taking out billions of dollars in loans to prevent a run on deposits after the Bankman-Fried stock market crash.
The investigation, which began in recent weeks, addresses one of the most important open questions surrounding the FTX debacle: What did the banks and intermediaries working with the Bankman-Fried firms know about what US officials have called a years old scheme to defraud investors and customers?
The former FTX CEO and co-founder and key members of his former inner circle have been accused of improperly diverting billions of dollars in assets belonging to exchange clients to Alameda, who also founded Bankman-Fried. Bankman-Fried has pleaded not guilty to a series of charges brought by US prosecutors and lives with his parents in California ahead of a trial scheduled for later this year.
Alameda opened an account with the bank in 2018 before FTX was founded, according to Silvergate. The bank has said it is reviewing transactions involving accounts associated with FTX and Alameda and that it conducted due diligence on the companies during the onboarding process and through ongoing monitoring. The firm is subject to annual reviews by its banking regulator, the Federal Reserve, as well as independent audits.
Silvergate modeled itself as a go-to bank for cryptocurrency companies and was one of the first service providers for the industry. He created systems to enable real-time fiat transactions between cryptocurrency customers with deposits at the bank. The firm had maintained a reputation among some former prosecutors turned cryptocurrency enthusiasts for being careful about complying with US laws.
The bank has previously noted in financial filings that working with digital currency firms can pose regulatory risks. But his work with companies linked to Bankman-Fried has caused by far his biggest headache in Washington.
A bipartisan group of senators sent a letter to Silvergate asked on Monday what he knew about FTX’s alleged misuse of client funds, saying the company’s previous responses on the subject were “evasive and incomplete.”
A Silvergate representative on Tuesday said the firm has a comprehensive compliance and risk management program and has conducted significant due diligence on FTX and Alameda Research.
Bankman-Fried has publicly said that Alameda’s bank accounts were used to move FTX funds. The deal was a way for FTX to circumvent banks’ reluctance to host crypto assets due to potential regulatory issues, people familiar with the matter told Bloomberg News in November.
Meanwhile, the lender is also defending itself against a potential class action lawsuit alleging securities fraud by investors who claim the bank has been uncommunicative about its financial controls, citing the FTX collapse.
Silvergate disclosed in early January that it had $4.3 billion in short-term Federal Home Loan Bank advances and had about $4.6 billion in cash and cash equivalents at the end of 2022. It was one of multiple banks cryptocurrency friendly that the originally established program used. under President Herbert Hoover to boost mortgage lending.
— With the assistance of Max Reyes, Allyson Versprille and David Scheer.
