2nd March 2023 – (California) Silvergate Capital Corp., a cryptocurrency-friendly bank, has announced that it is examining its viability and delaying its annual report to review financial controls. This announcement comes in the wake of the collapse of Sam Bankman-Fried’s FTX, which has caused Silvergate’s shares to plummet by as much as 25%.
In a filing on Wednesday, Silvergate stated that it is currently analyzing certain regulatory and other inquiries and investigations pending with respect to the company. The company’s independent registered public accounting firm is also requesting detailed information relating to such matters, and the company is responding to these requests.
Silvergate sold additional debt securities in January and February, and losses related to its securities portfolio alongside other factors could impair its ability to operate as a going concern. The company also indicated that it is being investigated by the US Justice Department, confirming an earlier Bloomberg report.
Short sellers have been sending letters to the firm’s auditors and US regulators detailing what they view as misconduct on the part of the bank and its clients, including allegations of money laundering. The Justice Department’s fraud section is investigating Silvergate over its dealings with FTX and Bankman-Fried’s cryptocurrency hedge fund Alameda Research.
US lawmakers, including Senator Elizabeth Warren, have sent the bank multiple rounds of questions about its FTX relationships, calling the firm’s earlier responses evasive and incomplete.
Under securities rules, public companies of Silvergate’s size are required to file a comprehensive annual report, known as a 10-K, 60 days from the end of the fiscal year. The report must include audited financial statements as well as a letter certifying the results were prepared in accordance with accounting standards. The chief executive officer and the chief financial officer must also attest in writing that the report is accurate. Silvergate’s deadline for that was Wednesday. By filing a so-called NT 10-K, Silvergate must give a reason for the delay and then has another 15-days to submit the report.
Silvergate’s auditor, Crowe LLP, has received multiple letters from short sellers making allegations about Silvergate’s handling of customer funds and telling the accountants they’re required to investigate any issues material to its audit. A Crowe spokesperson declined to comment.
Silvergate was the most shorted US stock as of Tuesday, with approximately 81% of shares available for trading 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 come to light as federal prosecutors in Manhattan build their case against Bankman-Fried. In court papers filed last week adding more charges against Bankman-Fried, prosecutors outlined a scheme in which Silvergate accounts were allegedly used by Bankman-Fried and others to conceal funds actually used for FTX.
Without naming the bank, prosecutors allege 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 the indictment describes as being based in California. A November motion filed by FTX Trading in the Delaware bankruptcy case discloses two North Dimension accounts at Silvergate. A person familiar with the matter also said Bank 1 is Silvergate.
The filing doesn’t accuse the bank of any wrongdoing, and the Justice Department 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.