A federal judge this week denied a motion by the ex-CFO of the defunct Silvergate Bank to toss a securities fraud complaint brought against him by the Securities and Exchange Commission.
The opinion paves the way for the fraud case filed by the SEC last year to proceed. The suit alleges former finance chief Antonio Martino “engaged in a fraudulent scheme to mislead investors about the Bank’s dire condition,” after the 2022 bankruptcy of the crypto exchange FTX led to a “bank run and severe liquidity crisis” for Silvergate, according to the complaint.
The CFO’s role in company’s earnings presentations and reporting are at the heart of the case, which alleges Martino approved false information in an earnings release which “understated the Bank’s losses … and overstated a key leverage metric” for the bank and its parent company; that he made false and misleading statements on an earnings call; and that he “falsified the Bank’s financial statements and failed to devise and maintain important accounting controls.”
In his 26-page opinion and order, Judge Andrew L. Carter Jr. of the U.S. District Court of the Southern District of New York detailed the CFO’s involvement in two January 2023 presentations highlighting the projected impact of securities sales in the first quarter of 2023.
The SEC asserted the first presentation of Jan. 4 complied with generally accepted accounting principles and properly calculated the bank’s “other than temporary impairment,” showing that the bank needed $2.6 billion in liquidity to repay $2.4 billion in debt which would result in an OTTI charge of about $176.5 million. But Martino instead chose to accept the methodology of a Jan. 5 presentation, which the SEC said no longer considered declining total assets which reduced the OTTI to $134 million, with Martino approving an earnings release on the matter.
Noting that Martino contested whether the OTTI calculation was not compliant with GAAP, the judge asserted that the SEC supported its allegations in the matter. “The Court finds the SEC adequately alleges false statements of fact in the methodology Silvergate used for its OTTI calculation, and the Tier 1 Ratio incorporating that number, recorded in the earnings release and on the earnings call,” the order states.
The judge also rejected the protections invoked by the motion to dismiss related to the “bespeaks caution doctrine,” under which “forward-looking statement accompanied by sufficient cautionary language is not actionable because no reasonable investor could have found the statement materially misleading.”
The order cited case law asserting that cautionary language shouldn’t be boilerplate and that the disclaimers included by Silvergate in its earnings release did not warn of risks due to the use of methodology not compliant with GAAP.
“While Martino maintains that the disclaimers warned that ‘the future expected securities sales and resultant OTTI charge disclosed were directly tied to and subject to change based on the Bank’s deposit levels,’ this is not a warning that Silvergate’s calculations failed to account for a decline in total assets, as alleged in the complaint,” the order states. “Therefore, an investor had no way to contemplate such a risk.”
Last year Silvergate’s parent company, Silvergate Capital Corp., agreed to settle with the SEC for $50 million without admitting or denying any charges that it failed to monitor more than $1 trillion in customer transactions between 2021 and 2023 while misleading investors, CFO Dive sister publication Banking Dive previously reported. Two other executives, CEO Alan Lane and Chief Risk Officer Kathleen Fraher, settled for $1 million and $250,000, respectively, and agreed to a five-year ban on holding officer or director positions at another public company.
Attorneys for Martino and the SEC did not immediately respond to requests for comment.
