Crypto Bank Silvergate Plunges After It Says Investigates Viability, Delays Annual Report

by Arthur · March 1, 2023

(Bloomberg) — Cryptocurrency-friendly bank Silvergate Capital Corp. is examining its viability and said it is delaying its annual report to allow time to undergo financial scrutiny, following the collapse of Sam Bankman-Fried’s FTX. The shares plunged as much as 25 percent.

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“The company is currently analyzing certain regulatory and other inquiries and investigations that are pending with respect to the company,” La Jolla, Calif.-based Silvergate said in the filing Wednesday. “The Company’s independent registered public accounting firm also requests detailed information relating to such matters, and the Company responds to such requests.”

Silvergate said it sold additional debt securities in January and February and that losses related to the securities portfolio, along with other factors, could impair its ability to operate as a going concern. It also indicated it was being investigated by the US Department of Justice, confirming an earlier Bloomberg report.

Short sellers have sent letters to the firm’s auditors and US regulators detailing what they see as misconduct by the bank and its clients, including allegations of money laundering. The Justice Department’s fraud division is investigating Silvergate over its dealings with FTX and Bankman-Fried’s cryptocurrency hedge fund Alameda Research, Bloomberg News reported last month, citing people familiar with the matter.

The stock fell as low as $10.15 in extended trading in New York after the announcement.

US lawmakers, including Sen. Elizabeth Warren, have meanwhile sent the bank several rounds of questions about its FTX relationship, calling the firm’s previous responses evasive and incomplete.

Under securities regulations, public companies of Silvergate’s size are required to file a comprehensive annual report, known as a 10-K, 60 days after the end of the fiscal year. The report must contain audited accounts as well as a letter confirming that the results have been prepared in accordance with accounting standards. The CEO and CFO must also confirm in writing that the report is correct.

Silvergate’s deadline for that was Wednesday. By submitting a so-called NT 10-K, Silvergate must provide a reason for the delay and then has another 15 days to submit the report. Companies sometimes take much longer than that to comply, especially if it involves a reformulation. Silvergate reported a loss of $1 billion in the fourth quarter of 2022 as it sold securities to cover billions of dollars in customer withdrawals.

Silvergate’s auditor, Crowe LLP, has received several letters from short sellers James Gibson and Marc Cohodes alleging Silvergate’s handling of client funds and telling the accountants they are required to investigate any issues material to the audit, according to communications reviewed by Bloomberg.

A spokesperson for Crowe declined to comment.

“We are writing to alert you to the risk that customers of Silvergate have used the entity to engage in significant money laundering and that management of Silvergate has misrepresented its business operations potentially in violation of laws and auditing standards,” Gibson wrote in a February 6. letter.

The short sellers refer in the letter to Silvergate’s December response to the Senate, saying the bank’s anti-money laundering program is analyzed annually by independent auditors and challenging Crowe to issue a public statement clarifying the scope of the audits.

Gibson and Cohodes also sent letters to the Federal Reserve Board and the Justice Department urging investigations into the bank’s anti-money laundering controls and transactions involving crypto customers, according to documents seen by Bloomberg.

Silvergate was the most shorted U.S. stock on Tuesday, according to data from S3 Partners. About 81% of shares available for trading were sold short, greater than the percentage for distressed companies including Carvana Co. and Bed Bath & Beyond Inc.

Silvergate’s role in handling transactions for FTX and Alameda continues to emerge as federal prosecutors in Manhattan build their case against Bankman-Fried. In court papers filed last week that added more charges against Bankman-Fried, prosecutors outlined a scheme in which Silvergate accounts were allegedly used by Bankman-Fried and others to hide funds that were actually used for FTX.

Without naming the bank, prosecutors allege that Bankman-Fried opened accounts under the name North Dimension in an attempt to avoid stricter due diligence by the bank. The bank in the document is referred to as Bank 1, which is described in the indictment as being based in California. A November motion filed by FTX Trading in the Delaware bankruptcy case reveals two North Dimension accounts at Silvergate. A person familiar with the matter also said Bank 1 is Silvergate.

The filing does not accuse the bank of any wrongdoing, and the Justice Department’s investigation into Silvergate could end without charges. Silvergate previously said it was a victim of FTX and Alameda and that its full cooperation would set the record straight.

–With assistance from Miles Weiss.

(Updates with shares, investigation, FTX case, begin in the first paragraph.)