by Pam Martens and Russ Martens, Wall St On Parade:
Last week, on Tuesday, May 23, the Federal Reserve and California Department of Financial Protection and Innovation (the state banking regulator) hit the collapsed federally-insured bank, Silvergate Bank, and its parent, Silvergate Capital Corporation, with an enforcement action called a “Cease and Desist Consent Order.” The action was not announced to the public until yesterday.
A Consent Order is meant to function along the lines of a legal settlement, with the bank agreeing to the detailed terms of the Consent Order and waiving its right to judicial review. The individual signing the Consent Order on behalf of the bank was its controversial CEO, Alan Lane, who had allowed his federally-insured bank to get in bed with Sam Bankman-Fried’s house of frauds, including the FTX crypto exchange and Bankman-Fried’s hedge fund, Alameda Research. Lane also had allowed his deposit base to become heavily involved with other crypto-related companies.
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When details of the Bankman-Fried relationship with Silvergate Bank came out in the news, a run on deposits commenced. On January 5, Silvergate reported in a filing with the Securities and Exchange Commission (SEC) that 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 68 percent drop in deposits in one quarter.
The primary regulator of Silvergate Bank was, embarrassingly, the Federal Reserve, which had farmed out the examinations of the bank to the San Francisco Fed. The San Francisco Fed was also the primary supervisor for Silicon Valley Bank, which failed on March 10 and was put into FDIC receivership. (See our report: Silicon Valley Bank Was a Wall Street IPO Pipeline in Drag as a Federally-Insured Bank; FHLB of San Francisco Was Quietly Bailing It Out.)
Silvergate announced on March 8 that it was going to voluntarily wind down and liquidate itself. That announcement included this statement on its deposits: “The Bank’s wind down and liquidation plan includes full repayment of all deposits.” (We thought to ourselves at the time, do federal bank regulators really want to trust a bank with this dubious history to make its depositors whole?)
By March 29, Wall Street On Parade had serious questions about how Silvergate’s wind down and liquidation were proceeding. We wrote:
Silvergate Capital, the parent of Silvergate Bank – which has lost 90 percent of its share price year-to-date and announced it is winding down and liquidating — is still running a website that is putting a rosy glow on the bank’s operations. For example, under the heading of “Banking for the future,” the Silvergate website shares this:
“Silvergate Bank has served entrepreneurs in unique and niche industries for over 20 years. Recognizing digital currency’s potential during the sector’s infancy, we built strong relationships with pioneers who were turned away by traditional banks. This solidified our position as industry-leading partners and innovators which remains true today.”
On the date that we accessed the above statement on the public website of Silvergate Bank, it was a collapsing institution, its depositors in the digital currency field had mostly fled, and the bank was under an investigation by the U.S. Department of Justice. Adding to its troubles, Silvergate’s March 1 filing with the Securities and Exchange Commission indicated that record-keeping at the bank was in such shambles that it couldn’t even file its annual report for the full year of 2022 (Form 10-K) on time and it required more time to “record journal entries.”
Silvergate also noted in the SEC filing that “its independent registered public accounting firm” will require more time “to complete certain audit procedures, including review of adjustments not yet recorded and the evaluation of the effectiveness of the Company’s internal control over financial reporting.”
Last week, on May 22, Silvergate made another filing with the SEC, indicating that it has fired its independent public accounting firm, Crowe LLP, and won’t be filing any annual report for the year ended December 31, 2022 – ever. (Seriously, is this any way to garner public confidence in the U.S. banking system?)
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