Cryptocurrency-friendly bank Silvergate Capital Corp. is studying whether it's still viable and reviewing its financial controls, following the collapse of Sam Bankman-Fried's FTX. The shares plunged as much as 25%.
"The company is currently analyzing certain regulatory and other inquiries and investigations that are pending with respect to the company," La Jolla, California-based Silvergate said in a filing Wednesday, which also disclosed that it couldn't file its annual report on time. "The company's independent registered public accounting firm is also requesting detailed information relating to such matters and the company is responding to such requests."
Silvergate said it sold additional debt securities in January and February and that losses related to its securities portfolio alongside other factors could impair its ability to operate as a going concern. It also indicated it was being investigated by the Justice Department, confirming an earlier Bloomberg report.
Short sellers have been sending letters to the firm's auditors and U.S. regulators detailing what they view as misconduct on the part of the bank and its clients, including allegations of money laundering. The Justice Department's fraud section is investigating Silvergate over its dealings with FTX and Bankman-Fried's cryptocurrency hedge fund Alameda Research, Bloomberg News reported last month, citing people familiar with the matter.
The stock fell as low as $10.15 in extended New York trading following the announcement.
Lawmakers including Senator Elizabeth Warren, meanwhile, have sent the bank multiple rounds of questions about its FTX relationships, calling the firm's earlier responses evasive and incomplete.
Under securities rules, public companies of Silvergate's size are required to file a comprehensive annual report, known as a 10-K, 60 days from the end of the fiscal year. The report must include audited financial statements as well as a letter certifying the results were prepared in accordance with accounting standards. The chief executive officer and the chief financial officer must also attest in writing that the report is accurate.
Silvergate's deadline for that was Wednesday. By filing a so-called NT 10-K, Silvergate must give a reason for the delay and then has another 15-days to submit the report. Firms sometimes take much longer than that to comply, especially in the case of a restatement. Silvergate reported a
Silvergate's auditor, Crowe LLP, has received multiple letters from short sellers James Gibson and Marc Cohodes making allegations about Silvergate's handling of customer funds and telling the accountants they're required to investigate any issues material to its audit, according to communications reviewed by Bloomberg.
A Crowe spokesperson declined to comment.
"We write to alert you to the risks that customers of Silvergate have used the entity to engage in substantial money laundering and that management of Silvergate has misrepresented its business operations potentially in violation of law and auditing standards," Gibson wrote in a Feb. 6 letter.
The short sellers, in that letter, reference Silvergate's December response to the Senate saying that the bank's anti-money-laundering program is analyzed annually by independent auditors and challenging Crowe to issue a public statement clarifying the scope of its audits.
Gibson and Cohodes also sent letters to the Federal Reserve Board and the Justice Department urging investigations into the bank's anti-money-laundering controls and transactions involving crypto clients, according to documents seen by Bloomberg.
Silvergate was the most shorted U.S. stock as of Tuesday, according to data from S3 Partners. Approximately 81% of shares available for trading were sold short, greater than the percentage for distressed companies including Carvana Co. and Bed Bath & Beyond Inc.
Silvergate's role in handling transactions for FTX and Alameda continue to come to light as federal prosecutors in Manhattan build their case against Bankman-Fried. In court papers filed last week adding more charges against Bankman-Fried, prosecutors outlined a scheme in which Silvergate accounts were allegedly used by Bankman-Fried and others to conceal funds actually used for FTX.
Without naming the bank, prosecutors allege Bankman-Fried opened accounts under the name North Dimension in an attempt to avoid stricter due diligence by the bank. The bank in the document is referred to as Bank 1, which the indictment describes as being based in California. A November motion filed by FTX Trading in the Delaware bankruptcy case discloses two North Dimension accounts at Silvergate. A person familiar with the matter also said Bank 1 is Silvergate.
The filing doesn't accuse the bank of any wrongdoing, and the Justice Department investigation into Silvergate could end without charges. Silvergate previously
— With assistance from Miles Weiss
