U.S. prosecutors in the Justice Department’s fraud unit are looking into Silvergate Capital Corp.’s dealings with the fallen crypto giants FTX and Alameda Research, according to people familiar with the matter.
The criminal investigation is examining Silvergate’s hosting of accounts tied to Sam Bankman-Fried’s businesses, said the people who asked not to be identified to discuss the confidential probe. The review adds to mounting scrutiny of the La Jolla, California-based bank, which has also drawn the attention of lawmakers.
The crypto-friendly bank hasn’t been accused of any wrongdoing and the inquiry, which is in its early phases, could end without charges being brought.
Representatives for Silvergate and the Justice Department in Washington, where the investigation is being conducted, declined to comment.
Silvergate shares tumbled more than 20% in extended trading on Thursday, erasing a 29% advance during regular market hours in New York.
Silvergate was among the lenders hit hardest by FTX’s sudden implosion last November. The bank reported a $1 billion loss last quarter and fired 40% of its staff. It also disclosed taking out billions of dollars in loans to stave off a run on deposits after Bankman-Fried’s exchange collapsed.
The probe, which started in the past several weeks, touches one of the biggest outstanding questions surrounding the FTX debacle: What did banks and intermediaries working with Bankman-Fried’s firms know about what U.S. officials have called a years-long scheme to defraud investors and customers?
The former FTX CEO and co-founder and key members of what was his inner circle have been accused of improperly diverting billions of dollars of assets belonging to the exchange’s customers to Alameda, which Bankman-Fried also started. Bankman-Fried has pleaded not guilty to a range of charges by U.S. prosecutors and is living with his parents in California ahead of a trial scheduled for later this year.
Alameda opened an account with the bank in 2018 prior to the founding of FTX, 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 firms during the onboarding process and through ongoing monitoring. The firm is subject to annual exams by its banking regulator — the Federal Reserve — as well as independent audits.
Silvergate modeled itself as a go-to bank for crypto companies and was an early provider of services catering to the industry. It built systems to allow real-time fiat currency transactions between cryptocurrency customers with deposits at the bank. The firm had maintained a reputation among some former prosecutors turned crypto enthusiasts as being careful about complying with U.S. laws.
The bank has previously noted in financial filings that working with digital-currency companies can pose regulatory risks. But its work with companies tied to Bankman-Fried has by far caused its biggest headache in Washington.
A bipartisan group of senators sent a letter to Silvergate on Monday asking what it knew about FTX’s alleged misuse of customer funds and said the firm’s previous answers on the subject were “evasive and incomplete.”
A Silvergate representative on Tuesday that the firm has a comprehensive compliance and risk management program and did significant due diligence on FTX and Alameda Research.
Bankman-Fried has said publicly that Alameda bank accounts were used to move FTX funds. The arrangement was a way for FTX to work around banks’ reluctance to host crypto tied assets given potential regulatory issues, people familiar with the matter told Bloomberg News in November.
Meanwhile, the lender is also defending against a potential class action alleging securities fraud by investors who claim the bank hasn’t been forthcoming about its financial controls, citing the FTX collapse.
Silvergate disclosed in early January that it held $4.3 billion in short-term Federal Home Loan Bank advances and had about $4.6 billion cash and cash equivalents at the end of 2022. It was one of multiple crypto-friendly banks that has utilized the program originally set up under President Herbert Hoover to bolster mortgage lending.
— With assistance from Max Reyes, Allyson Versprille and David Scheer.