On February 28, 2023, Judge Cathy Ann Bencivengo of the United States District Court for the Southern District of California appointed Cohen Milstein and Bernstein Litowitz, jointly, as Lead Counsel in this securities class action alleging that Silvergate, a holding company for Silvergate Bank, which is a federally regulated depository and lender for major cryptocurrency platforms, including Coinbase, Genesis, and FTX, made materially false and misleading statements about the Company’s compliance framework, as well as its anti-money laundering and customer identification programs.
In the same February 28 order, the court appointed International Union of Operating Engineers, Local No. 793, Members Pension Benefit Trust of Ontario, UMC Benefit Board, Inc. and Wespath Institutional Investments LLC, both as administrative trustees of the Wespath Funds Trust, Indiana Public Retirement System, Boston Retirement System, and Public School Teachers’ Pension & Retirement Fund of Chicago (collectively) as Lead Plaintiff.
Lead Plaintiff and Silvergate investors claim they incurred significant losses, beginning on November 7, 2022, upon learning that the Company compliance practices were lax and exposed the Company to potential money laundering and criminal activity. Then, on January 5, 2023, Silvergate disclosed that the collapse of its client, FTX, had led to a run on Silvergate Bank, causing its deposits to decline by $8.1 billion, or over 68%, over the three months ending in December 2022. This led to an acute liquidity crunch, which forced Silvergate to sell off illiquid securities for a loss of over $700 million and to borrow $4.3 billion in short-term advances from Federal Home Loan Banks
Originally filed on January 19, 2023, Plaintiffs, who acquired shares of Silvergate Capital Corporation Class A common stock between November 11, 2020 and January 5, 2023, inclusive (the “Class Period”), and/or acquired shares traceable to either of the Company’s secondary public offerings conducted on or around January 20, 2021 and December 6, 2021, allege that Silvergate defrauded investors in violation of the Securities Exchange Act of 1934, U.S. Securities and Exchange Commission (“SEC”) Rule 10b-5, and other federal statutes.
As a federally regulated banking institution, Silvergate is subject to a wide variety of federal regulations, such as anti-terrorism and anti-money laundering (AML) regulation by the Office of Foreign Assets Control (OFAC) and the Financial Crimes Enforcement Network (FCEN), including the Bank Secrecy Act and the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001.
A critical component of Silvergate’s cryptocurrency business was its one-of-a kind service called the Silvergate Exchange Network (“SEN”). The SEN was the cryptocurrency world’s closest approximation to the SWIFT banking system, which allowed Silvergate customers to send U.S. dollars and euros between eligible counterparty SEN accounts at any time of day using the Company’s application programming interface.
Throughout the Class Period, Plaintiffs allege that Silvergate repeatedly touted its “strong regulatory compliance program”—including its anti-money laundering policies and Know Your Customer (“KYC”) procedures —as a foundation for its growth.
The truth began to emerge on November 7, 2022, after the market closed, when Silvergate announced the sudden and unexplained demotion of its Chief Risk Officer, Tyler Pearson—the son-in-law of CEO Alan J. Lane. Social media commenters noted Silvergate’s exposure to FTX and Alameda Research LLC and questioned whether Pearson’s demotion indicated a lack of adequate oversight of Silvergate’s regulatory compliance. In response to this news, the price of Silvergate stock declined by $11.54 per share, or 22.6%, from a closing price of $50.96 per share on November 7, 2022, to a closing price of $39.42 per share on November 8, 2022, on unusually high trading volume.
Over the ensuing months, additional disclosures regarding the Company’s lax compliance practices reached investors, further impacting the price of Silvergate stock. Then, on January 5, 2023, the Company disclosed that the collapse of FTX had led to a run on Silvergate Bank, causing its deposits to decline by $8.1 billion, or over 68%, over the three months ending in December 2022. This led to an acute liquidity crunch, which forced Silvergate to sell off illiquid securities for a loss of over $700 million and to borrow $4.3 billion in short-term advances from Federal Home Loan Banks. In response to this news, the price of Silvergate stock declined by $9.38 per share, or 42.7%, from a closing price of $21.95 per share on January 4, 2023 to a closing price of $12.57 per share on January 5, 2023, on unusually high trading volume.
The case is In re Silvergate Capital Corporation Securities Litigation, Case No. 3:22-CV-1936-CAB-MSB, pending in the United States District Court for the Southern District of California.