Marc Cohodes is Fired Up - Vol. 2

Part II of the series on the famed short seller

This post was intended to be part of a series about Marc Cohodes’ short of Silvergate Bank. On Wednesday, March 1, the first volume was released. Then later in the day Silvergate filed an NT 10K and the stock got crushed in after hours trading. Now it’s probably a coin flip as to which has a longer life span - this newsletter series, or Silvergate Bank.

None of this is financial advice. Shorting shady companies is a dangerous game and better left to professionals.

Note that if you haven’t already listened to the podcast episode about Marc titled “Life’s Too Short” then I recommend you do that before reading this post.

The Sleepy Bank in La Jolla

Yesterday I posted a stock chart for Silvergate Bank that covered the last six months. It occured to me that to understand Silvergate it really helps to zoom out a little. The graph below is as close as you can get to the finance version of a VH1 Behind the Music episode.

Here’s Marc Cohodes talking about the origins of Silvergate. I should also say that this conversation was recorded on Thursday, February 23.

Marc Cohodes - The Sleepy Bank in La Jolla

If you listen to Silvergate’s CEO, Alan Lane, talk about why the bank got into crypto, he admits that the problem the bank set out to solve was that crypto firms had trouble opening and keeping bank accounts.

I think it’s fair to look at that goal in two ways. On one hand if there’s a new technology like Bitcoin, that traditional financial institutions are not comfortable with, maybe there should be a way for the actors in that space to have bank accounts.

On the other hand, the last six months have shown that some of these actors were just fraudsters using techno-libertarian-utopian branding to dress up age old scams.

So the key question is: are the scams happening despite the best efforts of Silvergate, or is Silvergate enabling the scams with lax controls?

Silvergate’s chief innovation is the SEN Network. SEN allows crypto firms to exchange dollars and crypto between themselves, 24/7/365 as they are proud of saying.

Marc Cohodes - The SEN Customers

In advance of recording this interview Marc gave me a letter that he’s sent to a number of regulators and law enforcement agencies. The letter lays out the support for various claims about Silvergate, including that the SEN Network is used by shady actors and money launderers.

Everyone knows about FTX, and their misuse of Silvergate accounts. But Marc’s letter contains 86 footnotes that get into Silvergate’s other customers.

Here’s a screenshot of just some of the footnotes.

As an example of the other evidence offered, he mentions this affidavit found by Aurelius Value. This puts Silvergate accounts smack dab in the middle of a money laundering operation.

AV @AureliusValue

$SI Recently subpoenaed Silvergate bank records reveal $425 million in transfers from $SI crypto bank accounts to South American money launderers. Affadavit from investigation into crypto crime ring linked to smugglers/drug traffickers (we are short): tinyurl.com/44s7nuee

Companies with falling share prices have a playbook that they use, and page one is usually: blame the short sellers!

It’s part of the standard operating procedure. It’s not very creative. It tends not to work. But it is reliably used.

As Marc points out, the claims from Aurelius are a huge problem. Companies can attack a person, but evidence must be refuted. And Aurelius has brought the goods multiple times.

Marc Cohodes - Comments on Aurelius

Silvergate hasn’t completely ignored the accusations that their controls are lax. The operative word there is “completely.”

They’ve trotted out some very weak explanations, and then when those rebuttals didn’t work they simply repeated them.

Squawk on the Street @SquawkStreet

. @silvergatebank CEO Alan Lane sets the record straight with @MorganLBrennan about the crypto-friendly bank's exposure to the recent FTX fallout. $SI

The TLDR for that clip is that the Alan Lane says that actually the bank does shut down customers sometimes!

So wait, they banked one of the biggest alleged corporate frauds that anyone can remember? And SBF has already admitted to some misuse of bank accounts? And evidence of other banking shenanigans has come to light more recently - including an account for “North Dimension” which was also used to circumvent FTX’s inability to take deposits on their own.

AV @AureliusValue

@Tom___Web The other problem is that North Dimension was sending/receiving thousands of foreign wires amounting to Billions of dollars, sometimes with references to FTX accounts. Activity that seems not remotely consistent and should have raised obvious concerns.

So what accounts did Silvergate actually shut down?

Did Pablo Escobar have an account at some point and that’s the one customer they 86’d?

Silvergate talks about having a compliance first culture, but as Marc points out in his letter to regulators, even if they were serious about compliance the customer list would make it nearly impossible. These crypto companies are spread out all over the globe if you can even figure out where their headquarters might be.

How can Silvergate possibly be subjecting these companies to the scrutiny they deserve? Is Silvergate really doing customer site visits all over the world?

I heard a podcast recently that said that in crypto you’re not dealing with the A team, you’re probably not even dealing with the B team. This might be a good time to bring up that at one point Silvergate’s Head of Risk was the CEO’s son-in-law.

Marc Cohodes - Alan Lane’s Son-in-Law

As I’ve been typing this post I’ve had to go back to Twitter to frequently check whether there’s any news on Silvergate. The stock has also dropped throughout the day. When I started the post it was in the 7s. Now it has a 5 in front of it. Yesterday it was in the teens.

Every hour seems to bring a new announcement that someone is done transacting with Silvergate.

Today is Thursday. Weekends tend to be a pretty bad time for wobbly banks. I don’t know that this weekend will be the one for Silvergate, but it might be soon.

When I talked to Marc last Thursday he laid out what he thinks the end will look like for Silvergate. He thinks it all ends in a regulator brokered shotgun marriage.

Marc Cohodes - End Game

It is stunning to think about a bank that traded for $200/share at its peak being forced into another bank at 13 cents a share. I asked Marc about legal liabilities and potential regulatory fines that might be coming for Silvergate. But he said it doesn’t even matter. There is no “there” there.

Marc Cohodes - Silvergate Book Value

I have more audio from Marc, but it became clear that I might not have very much time left.

So we’ll wait and see what happens. I’m also working on packaging everything up into a full podcast episode.

Now I’m back to watching Twitter to see if there’s any news.

John Reeder

Risk of Ruin Podcast