Prosecutors in the Justice Department’s fraud unit are investigating Silvergate Bank’s relationship with FTX and Alameda Research, Bloomberg reported Thursday.
The investigation is looking into Silvergate’s hosting of accounts linked to former FTX CEO Sam Bankman-Fried, the wire service reported, citing people familiar with the matter.
Bankman-Fried, who admitted to “unknowingly commingl[ing customer] funds” between FTX and Alameda despite promises to the contrary, pleaded not guilty last month to federal charges including wire fraud and conspiracy to commit securities fraud.
Silvergate’s ties to Bankman-Fried have placed the bank under the scrutiny of lawmakers in recent months. As part of prosecutors’ case against Bankman-Fried, more than $100,000 was seized from accounts bearing his name at the La Jolla, California-based crypto-focused bank.
Silvergate hasn’t been accused of any wrongdoing, according to the sources, and the inquiry may end without charges.
Silvergate and the Justice Department declined to comment, according to Bloomberg.
Silvergate was hit hard by FTX’s November collapse. On top of losing $1 billion and cutting 40% of its staff, the bank took a $4.3 billion cash injection from the Federal Home Loan Bank of San Francisco to remain liquid during a rapid run on deposits. The loan makes up nearly all of Silvergate’s current cash on hand, which the company reportedto be $4.6 billion last month.
Sens. Elizabeth Warren, D-MA, Roger Marshall, R-KS, and John Kennedy, R-LA, this week penned a letter to Silvergate CEO Alan Lane, pressing him on his knowledge of FTX’s alleged misdoings and expressing that they were “disappointed by [his] evasive and incomplete response” to a Dec. 5 letter inquiring about the bank’s relationship with the bankrupt crypto exchange.
The senators took aim at both Silvergate and the Federal Reserve for their inability to “identify what we now know were extraordinary gaps in Silvergate’s due diligence process,” and said that by taking the cash injection from FHLB, Silvergate introduced crypto market risk further into the traditional banking system.
Meanwhile, policy advocates are drawing attention to a 2020 rule change addressing brokered deposits at the Federal Deposit Insurance Corp. that “opened the door for ... Silvergate and others to load up on deposits from crypto firms without taking precautions to protect themselves against volatility,” American Banker reported Thursday.
Brokered deposits are collected by a third party from individuals to then be deposited as a single block. The FDIC had long held restrictions on brokered deposits because they tend to come and go without much notice, but in 2020 attempted to modernize the rules. The amendment, according to some policy advocates, “was a giveaway to the unregulated sectors at the expense of banking sector stability,” according to American Banker.
Brian Brooks, former acting comptroller of the currency, told American Banker, however, that brokered deposits were not Silvergate’s main issue, but rather its $8.1 billion in outflows from a bank run following FTX’s collapse.