Silvergate Bank Under Probe by US DOJ Over Dealings with FTX

The shares of American financial services giant Silvergate Capital Corp (NYSE: SI) have plunged by 13.16% to $18.21 in the Pre-Market after reports emerged that the firm’s banking unit is under probe by the United States Department of Justice (DoJ).

As reported by Bloomberg, the US DoJ’s fraud unit is in charge of the investigations and the regulators seek to explore whether the firm had any fraudulent relationship with the bankrupt FTX derivatives exchange. Per the report, no indictment has been brought against the company at this time.

Specifically, the regulators are digging into the hosting of accounts tied to Sam Bankman-Fried’s businesses. According to sources who asked not to be named, the inquiry is still in its earliest stages and there is no likelihood that any charges will be brought on the company at this time.

As a crypto-based bank, Silvergate has experienced significant headwinds owing to the crypto winter. With declining revenues and general devaluation, the pressures on the company are growing and the news of the probe is bad optics for the firm. As one of the firms with the biggest exposure to FTX, the bank recorded a $1 billion loss in the previous quarter.

Silvergate also buckled under the weight of its high operations cost in the previous quarter as it shed off as much as 40% of its staff.

As the current probe progresses, the insight prosecutors will be looking out for from Silvergate will relate to what it knows about the allegedly extended fraud scheme by FTX to defraud investors. FTX’s implosion and the operational management of the platform appeared like a coordinated scheme that took a bad early turn.

The Silvergate Bank and FTX Connection

While the current subject of the probe into Silvergate Bank appears speculative at this time, there is a deep tie between the financial institution and FTX. Alameda Research, FTX’s sister firm opened an account with the bank as far back as 2018. At the time, the main FTX exchange had not been established.

With the collapse of both firms, Silvergate Bank has revealed that it followed due diligence at the time when it onboarded them. The bank also said it continued monitoring the activities of the exchange following the initial onboarding.

One major strong backing Silvergate is leaning on since FTX collapsed is because it adheres to core banking laws. Silvergate is constantly being audited by regulators and independent auditors and no impropriety has been discovered thus far.

Despite the exposure to FTX, the bank said it has about $4.6 billion in cash and cash equivalents at the end of 2022. Depending on how the DoJ probe on the relationship between Silvergate Bank and FTX turns out, the firm will need to do everything it can to rebuild investor confidence.

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