Federally-Insured, Crypto-Focused Silvergate Bank Loses 43 Percent of Its Market Value Yesterday as Depositors Flee

[Gunnar Larson]

https://wallstreetonparade.com/2023/01/federally-insured-crypto-focused-silvergate-bank-loses-43-percent-of-its-market-value-yesterday-as-depositors-flee/


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.
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