This week, a federal judge rejected a motion by the former chief financial officer of the defunct Silvergate Bank to dismiss a securities fraud lawsuit filed against him by the U.S. Securities and Exchange Commission (SEC).

The ruling paves the way for the fraud case filed by the SEC last year to proceed. According to the complaint, the SEC alleges that former treasurer Antonio Martino "engaged in a fraudulent scheme designed to mislead investors about the bank's dire condition." The allegations stem from a "run and severe liquidity crisis" that Silvergate faced after the bankruptcy of cryptocurrency exchange FTX in 2022.

At the heart of the case is Martino's role in the company's earnings releases and reports. The SEC alleges that Martino approved false information in an earnings report that "understated the bank's losses... and overstated a key leverage metric for the bank and its parent company"; he also made false and misleading statements during earnings calls; and he "falsified the bank's financial statements and failed to design and maintain important accounting controls."

In a 26-page opinion and order, Judge Andrew L. Carter Jr. of the U.S. District Court for the Southern District of New York detailed the CFO's involvement in two presentations in January 2023 that highlighted the expected impact of securities sales in the first quarter of 2023.

The SEC claims that the first presentation on January 4 complied with generally accepted accounting principles (GAAP) and correctly calculated the bank's "other-than-temporary impairment" (OTTI), showing the bank needed $2.6 billion in liquidity to repay $2.4 billion in debt, which would result in an OTTI charge of approximately $176.5 million. But Martino instead chose the methodology from the January 5 presentation, which the SEC says no longer considered the decline in total assets, reducing the OTTI charge to $134 million, and Martino subsequently approved the related earnings report.

In response to Martino's argument that the OTTI calculation did not comply with GAAP, the judge asserted that the SEC's allegations on this matter were well-founded. The order states: "The Court finds that the SEC sufficiently alleged that Silvergate made false factual statements regarding the methodology used in its OTTI calculation, as well as the recording of the Tier 1 capital ratio containing that figure in earnings reports and earnings calls." The judge also rejected the protection of the "bespeaks caution doctrine" cited in the motion to dismiss. That doctrine holds that "predictive statements accompanied by sufficient cautionary language are not actionable because a reasonable investor would not find such statements materially misleading."

The order cited precedent in noting that cautionary language should not be boilerplate, and that the disclaimers included in Silvergate's earnings reports did not warn of risks arising from the use of a methodology that did not comply with GAAP. The order states: "While Martino insists that the disclaimers warned that 'disclosures regarding anticipated future securities sales and the resulting OTTI charges were directly related to the bank's deposit levels and could vary based on those levels,' this does not warn, as alleged in the complaint, that Silvergate's calculation failed to account for the decline in total assets. Therefore, investors could not foresee such risks."

Last year, Silvergate's parent company, Silvergate Capital Corp., agreed to settle with the SEC for $50 million, without admitting or denying the allegations—namely, that it failed to monitor over $1 trillion in customer transactions between 2021 and 2023 while misleading investors. As previously reported by Banking Dive, a sister publication of CFO Dive, 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 from serving as officers or directors of another public company.

Lawyers for Martino and the SEC did not immediately respond to requests for comment.