Crypto bank Silvergate Capital Corp. is the second most shorted security in the United States, with more than 72.5% of its shares short, according to the latest short interest report on Feb. 9.
The Financial Industry Regulatory Authority (FINRA) collects and publishes short positions on all equities twice a month. A short position means that investors and traders believe that the price of a security, such as a stock, will decline in value. A short seller profits from a security’s falling price.
As of this writing, Silvergate (SI) shares are down more than 87% in the last twelve months. The bearish sentiment on Silvergate stems from its recent earnings report and legal battles the company is facing over its relationship with bankrupt companies FTX and Alameda Research.
On January 17, the bank announced a $1 billion net loss attributable to common shareholders in the fourth quarter of 2022. According to a report by the US Securities and Exchange Commission (SEC), Silvergate recorded significant deposit outflows during the period, forcing the company to seek wholesale financing and sell debt securities to maintain liquidity.
Silvergate reportedly borrowed $3.6 billion from the US Federal System of Mortgage Loan Banks to mitigate the effects of a surge in withdrawals following the collapse of cryptocurrency exchange FTX in November 2022.
The bank is facing investigations and lawsuits in the US for allegedly assisting FTX in fraudulent activities, including lending and mixing user funds.. The company has been accused of “fostering fraud in FTX’s investments,” while shareholders claim Silvergate violated the Securities Exchange Act of 1934. A Justice Department investigation into the bank’s role in FTX business.
According to Silvergate, Alameda opened an account with the bank in 2018, before the launch of FTX. The company claims to have carried out due diligence at the time and monitored the situation on an ongoing basis.
Moody’s Investors Service recently reacted to the bank’s situation, downgrading Silvergate Capital and its bank to “junk”, with a negative outlook for both organizations.
Silvergate did not immediately respond to Cointelegraph’s request for comment.
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