By Pam Martens and Russ Martens: January 6, 2023 ~

If you’re looking for the poster child for everything that is toxic about mixing crypto with federally-insured banks, look no further than Silvergate Capital Corporation, parent of federally-insured Silvergate Bank. Yesterday, the company lost 42.73 percent of its market capitalization in one trading session, putting its stock price losses at 91 percent over the past 12 months.

The stock has been plunging since April of last year. Then came the jarring news on November 11 that one of its large customers, crypto exchange FTX, was filing for Chapter 11 bankruptcy along with its sister hedge fund, Alameda Research – which, it turns out, had been using (and losing) billions of dollars of FTX customer funds to trade and acquire without the knowledge of customers. More than 100 opaque affiliates of FTX, many headquartered in offshore locations, also filed for bankruptcy. Three executives of the two firms have been indicted by the U.S. Department of Justice on a combined total of 19 criminal counts and new management has testified to Congress that $8 billion of customer funds are missing.

On the same day that FTX made its initial filing in bankruptcy court in Delaware, Silvergate Bank released a statement which included this nugget from its CEO, Alan Lane:

“In light of recent developments, I want to provide an update on Silvergate’s exposure to FTX. As of September 30, 2022, Silvergate’s total deposits from all digital asset customers totaled $11.9 billion, of which FTX represented less than 10%. Silvergate has no outstanding loans to nor investments in FTX, and FTX is not a custodian for Silvergate’s bitcoin-collateralized SEN Leverage loans. To be clear, our relationship with FTX is limited to deposits.”

Customers interpreted that statement to mean that Silvergate had upwards of $1 billion exposure to alleged fraudster FTX and started a run on deposits at the bank. According to a statement released yesterday by Silvergate, its “total deposits from digital asset customers declined to $3.8 billion” as of December 31, 2022 (down from the previously reported $11.9 billion on September 30, 2022.) That’s a stunning 68 percent drop in deposits in one quarter.

Yesterday’s statement from Silvergate also included the confidence-draining news that the company is firing 40 percent of its workforce and that it had met the demand for customer withdrawals during the quarter as follows:

“Silvergate sold $5.2 billion of debt securities for cash proceeds during the fourth quarter of 2022. The sale resulted in a loss on the sale of securities and related derivatives of $718 million during the fourth quarter of 2022.”

Silvergate is also likely to have to start reserving for a wave of lawsuits coming at it. The Federal District Court for the Southern District of California currently shows four class action lawsuits against Silvergate. The first of the class actions to be filed on December 1, 2022 is Sepulveda Zuleta et al v. Silvergate Capital Corporation et al, (3:22-cv-01901).The attorneys for the plaintiffs are Fitzgerald Joseph LLP; Casey Gerry LLP; and Blood Hurst & O’Reardon, LLP. The complaint alleges the following:

“Silvergate and its Chief Executive and Risk Officers were complicit in and responsible for some of these fraudulent losses [of FTX] because, in violation of its Know-Your-Customer (KYC) and Anti-Money Laundering (AML) regulatory obligations, knowingly or negligently permitted FTX to direct customer deposits to Alameda Research, a hedge fund that is a wholly separate entity also owned by FTX’s founder and Chief Executive Officer, Sam Bankman-Fried.”

Another class action lawsuit against Silvergate was filed on December 7, 2022 and styled as Rosa v. Silvergate Capital Corporation, et al (3:22-cv-01936). According to the docket sheet, plaintiffs in that case are represented by the law firm Glancy Prongay & Murray. Of note, however, is that another well-known class action law firm, Robbins Geller Rudman & Dowd LLP, is advertising for plaintiffs in that action. This sometimes happens when a law firm is attempting to position itself as lead counsel or co-lead counsel in a consolidated class action involving multiple plaintiffs and law firms.

A third class action lawsuit was filed on December 13, 2022, styled as Guz v. Silvergate Capital Corporation et al. The law firm representing plaintiffs in that lawsuit is Pomerantz LLP.

The very next day, December 14, 2022, a fourth class action was filed against Silvergate, captioned Gonzalez v. Silvergate Bank (3:22-cv-01981). The law firms representing plaintiffs are Girard Sharp LLP and Hartley LLP.

Silvergate is represented in the various cases by Sheppard Mullin Richter and Hampton LLP. The law firm’s website indicates that it has 1,000 attorneys in 16 offices worldwide. It has a White Collar Defense and Investigations team that characterizes its work as follows:

“We defend against all manner of allegations, including health care fraud, money laundering, False Claims Act, Foreign Corrupt Practices Act, tax fraud, business fraud, securities fraud, foreign and domestic bribery, public corruption, mail, wire, and bank fraud, cyber-crime, customs violations, and environmental crimes. We often devise, monitor and revise compliance programs and, if necessary, conduct internal investigations to detect and remedy problems before they cause more damage. We are also more than ready to fight – be it through Grand Jury proceedings, court proceedings, trial and appeal.”

Many of those services may come in very handy for Silvergate.