‘Crypto’ bankers unnerved by TD Bank’s $1.2 billion Ponzi settlement

TD Bank’s $1.2 billion settlement over its ties to an infamous Ponzi scheme doesn’t bode well for financial institutions that looked the other way while crypto Ponzi scammers ran wild.

On Monday, TD Bank Group announced that it had agreed to a “settlement in principle relating to litigation involving the Stanford Financial Group.” The settlement will see TD pay US$1.205 billion to the court-appointed receiver for the Stanford Receivership Estate. Assuming the courts approve, the payment will resolve all current and future claims brought by the receiver, the Official Stanford Investors Committee, and other plaintiffs in the litigation.

Texas native Allen Stanford is currently serving a 110-year federal prison sentence after being convicted in 2012 on multiple fraud charges and violations of U.S. Securities and Exchange Commission (SEC) rules. The Stanford Financial Group offered certificates of deposit that purported to consistently deliver above-average rates of return for investors, but the company was actually misappropriating billions in investors’ funds for its own enrichment.

TD “expressly” denied any “liability or wrongdoing” concerning Stanford’s Ponzi, insisting that it only “provided primarily correspondent banking services to Stanford International Bank Limited and maintains that it acted properly at all times.” TD only agreed to the settlement “to avoid the distraction and uncertainty of continuing a long legal proceeding.”

TD was one of three banks involved in Monday’s settlement. Independent Bank (formerly the Bank of Houston) agreed to pay $100 million, while HSBC Holdings is paying a comparatively minor $40 million. Like TD, neither bank admitted any liability or wrongdoing. Two other banks—France’s Société Général SA and Mississippi’s Trustmark Corp—previously agreed to pay a combined $257 million to atone for their lack of oversight.

The banks were sued by former Stanford investors who accused the institutions of ignoring “numerous red-flag indications of money laundering,” including “large, round-dollar, high-velocity, in and out layering transactions, with no apparent connection to any investing that Stanford claimed he was doing.”

The settlement was reached the day before the trial was to get underway in Houston. TD is currently in the process of acquiring two U.S.-based firms worth nearly $15 billion and clearly didn’t relish the possible exposure of dirty laundry that might have complicated or even scuppered those deals.

The fact that TD won a similar case in the Canadian province of Ontario didn’t appear to fill the company with confidence that it could expect a similarly favorable result south of the 49th parallel.

Crypto banks next on the chopping block

The settlements have ominous implications for banks that handled transactions on behalf of what has now been revealed as crypto-based Ponzis, including Sam Bankman-Fried’s FTX and Alameda Research, Alex Mashinsky’s Celsius Network and a host of other dubious token-focused entities.

The two banks most likely to find themselves in the hot seat are California-based Silvergate Bank and New York’s Signature Bank. Both banks saw their respective stock prices tumble on Monday, suggesting investors were able to see a potential connection with the Stanford settlement. However, both companies managed to eke out modest gains on Tuesday.

Both banks run proprietary ‘settlement networks’ that allow crypto firms to conduct transactions 24/7. Silvergate’s is called the Silvergate Exchange Network (SEN), while Signature’s is called Signet. Both banks have belatedly sought to limit certain companies’ access to these networks, mainly after the damage has already been done.

As in the Stanford case, the banks most involved in crypto activity had strong financial incentives to ignore obvious signs of fraud and other criminal activity. Silvergate became more or less dependent on its crypto clients, to the point that the bank endured such a flurry of withdrawals in the period following FTX’s November bankruptcy that it was forced to tap a Depression-era federal solvency program to keep its lights on.

The recent superseding indictment against SBF added bank fraud to his already lengthy list of financial crimes. The indictment offered specifics on how SBF (with the help of attorney Daniel Friedberg) set up a fake electronics retailer called North Dimension and used it to funnel U.S. customer payments to and from his FTX/Alameda entities.

The indictment indicated that Bank-1—aka Silvergate—blithely accepted SBF’s account application and due diligence questionnaire and opened an account on behalf of North Dimension in April 2021 “without enhanced due diligence or review by Bank-1’s executive committee.”

Silvergate was also recently outed as providing the financial rails via which the Binance exchange was able to siphon over $400 million from accounts belonging to its ostensibly independent U.S.-facing exchange Binance.US. This was after the international Binance was supposed to have been cut off from accessing Silvergate’s SEN platform.

Silvergate faces a class action for being “integral to Bankman-Fried’s enterprise” through both “actions and inaction.” Signature has been hit with similar claims that accuse the bank of having “actual knowledge of and substantially facilitated the now-infamous FTX fraud.”

It seems likely that, once the smoke has cleared and SBF is safely behind bars, some U.S. banks will be looking at hefty financial penalties. But unlike TD et al., these penalties may be too great for the banks concerned to simply write it off as the cost of doing business and carrying on as normal.

Hot ‘crypto’ potato

This week, the Bank for International Settlements (BIS) released a report by its Basel Committee on Banking Supervision showing a dramatic reduction in banks’ exposure to cryptocurrencies from 2021 to mid-2022. On a global basis, the total value of tokens under banks’ custody fell 66%, partly due to last year’s dramatic decline in most digital assets’ fiat value.

Banks’ prudential crypto exposure—clearing, trading, derivatives, lending, etc.—rose 30%, partly “due to increased underlying cryptoasset activity.” However, the end of June 2022 timeline means many of last year’s major corporate and protocol failures had yet to be fully felt.

The report notes 11 banks in the Americas dealing with crypto (that participated in the survey), compared with just four in Europe and two in the rest of the world. Without naming names (but one can easily guess), the report notes that a single bank accounted for 62% of all crypto prudential exposure, while four other banks accounted for 35% of the rest.

It’s easy to imagine that these numbers would be strikingly different today and even more altered should Silvergate collapse under the weight of its own misbehavior. And with wronged U.S. investors increasingly aggressive in identifying parties that contributed to their financial plight, a collapse is more likely.

It remains to be seen what other crypto-linked entities may also be held liable for aiding and abetting some of the worst excesses of the past few years. It isn’t hard to imagine that crypto-focused VCs such as a16z and Digital Currency Group are finding it harder and harder to fall asleep most nights. Maybe try counting zeros on the checks you’ll have to write instead of sheep?

Follow CoinGeek’s Crypto Crime Cartel series, which delves into the stream of groups—from BitMEX to Binance, Bitcoin.com, Blockstream, ShapeShift, Coinbase, Ripple,
Ethereum, FTX and Tether—who have co-opted the digital asset revolution and turned the industry into a minefield for naïve (and even experienced) players in the market.