David Canellis

Silvergate is over. Investors are likely sad, short sellers probably grinning, but 11 insiders at the one-time major crypto bank sold out big at the top — raking in more than $103 million.



Former chairman Dennis Frank, who led the board between 1996 and 2021, made up about 25% of those sales.&nbsp;



Frank sold almost 189,000 shares between March and November 2021 for $140 each, on average. That was peak bull run, when bitcoin was worth as much as $69,000 and Silvergate stock as much as $220.



Silvergate stock now trades for under $4. It announced this week it would close down for good and enter liquidation. The firm had struggled to maintain customer confidence after one of its key clients, FTX, went belly up last November, leading to billions in withdrawals.



Executive vice president Derek Eisele and CEO Alan Lane also cashed out stock at the top, $20.6 million and $17.1 million, respectively, per OpenInsider data, which relies on SEC filings.



Other sellers around that time include Chief Strategy Officer Ben Reynolds ($2.5 million) and Chief Operating Officer Kathleen Fraher ($2.8 million).



(For the purposes of this article, “selling the top” was liberally defined as being between two dates: Jan. 1, 2021 and May 1. 2022 — which captures bitcoin starting out at $30,000, two major price peaks and its return to $30,000.)



<figure class="wp-block-embed is-type-wp-embed is-provider-flourish wp-block-embed-flourish"><div class="wp-block-embed__wrapper">
<iframe loading="lazy" class="wp-embedded-content" sandbox="allow-scripts" security="restricted" title="Interactive or visual content" src="https://flo.uri.sh/visualisation/13005223/embed#?secret=9AaXNZgGwR" data-secret="9AaXNZgGwR" frameborder="0" scrolling="no" height="575" width="700"></iframe>
</div><figcaption class="wp-element-caption">Silvergate insiders clustered their sales at the top, getting around $133 per share on average</figcaption></figure>



Altogether, the value cashed out by Silvergate insiders at the top represents 4% of the firm’s average market capitalization ($3.6 billion) throughout the crypto market peak.



Some had bought stock on the way up, particularly CEO Lane and director Thomas Dircks, who’d spent nearly $250,000 on 167,477 shares in Nov. 2019, spending on average $12 per share among smaller trades on other dates.



Lane later sold nearly 178,000 shares for $18.6 million between Jun. 2021 and Jul. 2022, for an average price of $104.75 — nearly 800% above his earlier average purchase price (Lane, along with other executives, continued to receive stock options throughout this period).



One executive, Michael Lempres, tried to buy the dip, spending $56,100 in Feb. 2022 on 500 shares. Those same shares are worth $2,000 today. He hasn’t yet disclosed any sales with the SEC.



<h2 class="wp-block-heading">Silvergate insiders are not alone&nbsp;</h2>



Together with executives at direct rival Signature, bitcoin-hungry software firm MicroStrategy, Block (formerly Square), as well as miners Marathon and Riot, 41 crypto insiders sold $661.4 million in shares as markets topped during the last bull run, averaging out to more than $16 million each.



Some sales were part of pre-lodged trading plans with the SEC (but not all). And that’s not even counting Coinbase, which went public as markets frothed in Q2 2021.



<figure class="wp-block-embed is-type-wp-embed is-provider-flourish wp-block-embed-flourish"><div class="wp-block-embed__wrapper">
<iframe loading="lazy" class="wp-embedded-content" sandbox="allow-scripts" security="restricted" title="Interactive or visual content" src="https://flo.uri.sh/visualisation/13006847/embed#?secret=V2jg1AufmF" data-secret="V2jg1AufmF" frameborder="0" scrolling="no" height="575" width="700"></iframe>
</div><figcaption class="wp-element-caption">Bitcoin-forward fintech Block (SQ) saw $151 million in insider selling across the same period</figcaption></figure>



Coinbase execs together cashed in more than $5 billion on its first day of trading alone, although those sales were a function of its direct listing, so shouldn’t be compared to the other stocks.



Updated at 2:52 pm, ET: Corrected figures.



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Selling The Top: Silvergate Execs Cashed Out $103M As Bitcoin Peaked

Shalini Nagarajan

<div id="highlights-block_62fe0e74ef5f0" class="highlights">
 <ul>
 <li>Numerous tokens saw prices begin rising 250 hours before Coinbase listings, academics found</li>
 <li> “Our findings identify cases that are yet to be prosecuted,” academics at the University of Technology Sydney wrote</li>
 </ul>
 
</div>



US federal regulators last month <a href="https://cms.blockworks.co/sec-charges-former-coinbase-product-manager-with-insider-trading/" target="_blank" rel="noreferrer noopener">charged</a> a former Coinbase employee with insider trading. Now, academics have found more staff at the leading crypto exchange could be up to no good.



Insider trading allegedly took place ahead of 10-25% of Coinbase listings between September 2018 and May 2022, according to a <a href="https://deliverypdf.ssrn.com/delivery.php?ID=922005065110005073030069077127014100030050050078068020092086098072067009101008089103029001033127027001029091100093031068023080016039074000002097116015007064027017107058092077003022099026123081102024016099001103091116091098071103106090073104031115022117&amp;EXT=pdf&amp;INDEX=TRUE" target="_blank" rel="noreferrer noopener">study</a> published by the University of Technology Sydney on August 12, spotted by <a href="https://decrypt.co/107671/coinbase-insider-trading-problem-study" target="_blank" rel="noreferrer noopener">Decrypt</a>.



They reckon insiders made profits of $1.5 million by trading before announcements. “Our findings identify cases that are yet to be prosecuted,” finance lecturers Ester Felez Vinas and Talis Putnins, and PhD candidate Luke Johnson wrote.&nbsp;



The study is limited in its scope, as samples have been extracted only from Coinbase.



Trading ahead of public listing, based on unfair informational advantage, is a violation of securities law. Coinbase is the largest publicly-traded crypto exchange, and new token listings on the platform <a href="https://www.ft.com/content/4e15d5b6-033b-4294-8aba-d95e02f51b3b" target="_blank" rel="noreferrer noopener">regularly inspire</a> price surges rendering early purchases profitable.



<h3 class="wp-block-heading">Insider trading could be worse on decentralized exchanges</h3>



The academics based their research, which isn’t yet peer-reviewed, on Coinbase listings. They used an archive site to validate the date and hour of original announcement posts.



Their final sample size included 146 token listings, of which 6 made their crypto exchange debut on Coinbase. They tracked the price movements of the tokens between 300 hours before Coinbase listing announcements, and 100 hours after.



“From visual inspection, we note that there is an evident [price] run-up pattern prior to the listing announcement starting at -250 hours,” the researchers wrote.



“The run-up continues until the listing announcement event, where we see a jump in price because of new information entering the market and traders reacting to the news. The run-up pattern we observe is consistent with the run-ups in prosecuted cases of insider trading in stock markets.”



<figure class="wp-block-image size-large"><img loading="lazy" decoding="async" width="1024" height="755" src="https://blockworks-co.imgix.net/wp-content/uploads/2022/08/Screen-Shot-2022-08-18-at-11.55.52-1024x755.png" alt="" class="wp-image-28261" srcset="https://blockworks-co.imgix.net/wp-content/uploads/2022/08/Screen-Shot-2022-08-18-at-11.55.52-1024x755.png?w=1024 1024w, https://blockworks-co.imgix.net/wp-content/uploads/2022/08/Screen-Shot-2022-08-18-at-11.55.52-1024x755.png?w=300 300w, https://blockworks-co.imgix.net/wp-content/uploads/2022/08/Screen-Shot-2022-08-18-at-11.55.52-1024x755.png?w=768 768w, https://blockworks-co.imgix.net/wp-content/uploads/2022/08/Screen-Shot-2022-08-18-at-11.55.52-1024x755.png?w=1536 1536w, https://blockworks-co.imgix.net/wp-content/uploads/2022/08/Screen-Shot-2022-08-18-at-11.55.52-1024x755.png?w=349 349w, https://blockworks-co.imgix.net/wp-content/uploads/2022/08/Screen-Shot-2022-08-18-at-11.55.52-1024x755.png?w=354 354w, https://blockworks-co.imgix.net/wp-content/uploads/2022/08/Screen-Shot-2022-08-18-at-11.55.52-1024x755.png?w=297 297w, https://blockworks-co.imgix.net/wp-content/uploads/2022/08/Screen-Shot-2022-08-18-at-11.55.52-1024x755.png?w=80 80w, https://blockworks-co.imgix.net/wp-content/uploads/2022/08/Screen-Shot-2022-08-18-at-11.55.52-1024x755.png?w=50 50w, https://blockworks-co.imgix.net/wp-content/uploads/2022/08/Screen-Shot-2022-08-18-at-11.55.52-1024x755.png?w=1878 1878w" sizes="auto, (max-width: 1024px) 100vw, 1024px" /><figcaption>Academics highlighted red flags surrounding listings of several cryptocurrencies including Polygon native token MATIC and algo-powered AMPL.</figcaption></figure>



The academics deduced insider trading was more likely to occur on decentralized exchanges (DEXs), which typically don’t have strict identity checks and allow pseudonymous trade.&nbsp;



In response to the study, Coinbase said the exchange &#8220;takes allegations of frontrunning incredibly seriously and we work hard to ensure all market participants have access to the same information.&#8221;



&#8220;We have zero tolerance for illicit behavior and monitor for it, conducting investigations where appropriate,&#8221; a company spokesperson told Blockworks in an emailed response. 



In a <a href="https://blog.coinbase.com/building-a-more-open-financial-system-how-coinbase-detects-bad-actors-1b12639f4127" target="_blank" rel="noreferrer noopener">May blog</a>, chief legal officer Paul Grewal wrote the exchange has a team dedicated to preventing and identifying instances of financial crime.&nbsp;



“If an investigation finds that a Coinbase employee was involved in misuse of company information related to asset listings, we will not hesitate to terminate them,” he wrote.



<h3 class="wp-block-heading">Former Coinbase product manager pleads not guilty to insider trading</h3>



In July, the US Securities and Exchange Commission (SEC) charged former Coinbase product manager Ishan Wahi for allegedly trading ahead of multiple cryptoasset listings based on confidential information.&nbsp;



Wahi entered a <a href="https://cms.blockworks.co/ex-coinbase-employee-accused-of-insider-trading-pleads-not-guilty/" target="_blank" rel="noreferrer noopener">not guilty plea</a>, with his lawyer David Miller arguing the charges should be dropped as insider trading only relates to securities or commodities.



According to him, the cryptoassets Wahi traded weren’t securities, which means they don&#8217;t fall under the SEC&#8217;s purview.



Miller is confident Wahi will be exonerated. “There are significant legal issues in this case and we have strong grounds for motions to dismiss and suppress,” he told Blockworks in an email.



This article was updated at 8:54 am ET to include comments from Coinbase.



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Start your day with top crypto insights from David Canellis and Katherine Ross. <a href="https://blockworks.co/newsletter/empire">Subscribe to the Empire newsletter</a>.



Explore the growing intersection between crypto, macroeconomics, policy and finance with Ben Strack, Casey Wagner and Felix Jauvin. <a href="https://blockworks.co/newsletter/onthemargin">Subscribe to the Forward Guidance newsletter</a>.



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