(Bloomberg) -- A bipartisan group of US senators is pressing Silvergate Capital Corp. over whether it knew about FTX’s alleged misuse of customer funds after the lawmakers found responses to an earlier inquiry to be “evasive and incomplete.”
The senators, including Democrat Elizabeth Warren and Republicans Roger Marshall and John Kennedy, sent a letter to Silvergate on Monday asking a series of questions about its ties to collapsed cryptocurrency exchange FTX. In a copy of the letter obtained by Bloomberg News, they said the firm in December had declined to fully answer related questions, citing restrictions on disclosing “confidential supervisory information.”
“This is simply not an acceptable rationale,” the senators wrote in their latest letter to Silvergate Chief Executive Officer Alan Lane. “Both Congress and the public need and deserve the information necessary to understand Silvergate’s role in FTX’s fraudulent collapse, particularly given the fact that Silvergate turned to the Federal Home Loan Bank as its lender of last resort in 2022.”
A representative for Silvergate said Tuesday that the firm has a comprehensive compliance and risk management program and did significant due diligence on FTX and Alameda Research.
Banks generally can’t disclose confidential supervisory information and in some cases could be held criminally liable if they do — even to Congress, according to Sultan Meghji, former chief innovation officer for the Federal Deposit Insurance Corp.
“It is not surprising that Silvergate (or any other bank) would use those rules to avoid responding to a questionnaire from Congress,” he said. “Congress should work with the banking regulators to get that information.”
Former FTX CEO Sam Bankman-Fried and other high-level executives from his inner circle have been accused of carrying out a fraudulent scheme that involved diverting billions of dollars of FTX’s customer assets to sister trading arm Alameda Research. Some of those funds were reportedly routed through accounts Alameda had at Silvergate.
Silvergate disclosed in early January that it held $4.3 billion in short-term Federal Home Loan Bank advances and had about $4.6 billion cash and cash equivalents at the end of 2022. That funding helped the company stave off a run on deposits after FTX’s collapse. It was one of several crypto-friendly banks that relied on the program originally set up under President Herbert Hoover to bolster mortgage lending.
In responses to the senators’ original letter in December, Silvergate said Alameda opened an account with the bank in 2018 prior to the founding of FTX. It also said it’s reviewing transactions involving accounts associated with FTX and Alameda.
The bank said it conducted due diligence on FTX and related entities both during the onboarding process and through ongoing monitoring. It noted that it is subject to annual exams by its banking regulator — the US Federal Reserve — as well as independent audits.
In Monday’s letter, the senators accused the company of leaving out crucial information that Congress needs to “assess the extent to which Silvergate is responsible for the improper transfer of FTX customer funds to Alameda” and to determine any compliance failures by the bank or auditors that could have enabled the alleged fraud.
They asked Silvergate to answer a new round of questions seeking information on whether the bank was aware that FTX was directing customers to wire funds to Alameda’s account at Silvergate or if it flagged any transactions as being suspicious. The senators also requested details on the firm’s due-diligence practices, the results of reviews conducted by the Fed and independent auditors, and how it plans to use the proceeds from its FHLB loan.
They gave Silvergate a Feb. 13 deadline to respond to the inquiries.
(Updates with comment from Silvergate in fourth paragraph.)
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