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About five years ago, a man I’ll call “Ben” took a marketing gig for a startup called Blockchain Terminal (BCT), which claimed to have raised $15 million to become the Bloomberg of cryptocurrency. Properly skeptical of the breathless hyperbole of this generation’s get-rich-quick grift, he demanded payment in cash and invoiced for every hour he worked.
But he did do the BCT boys one favor: So long as they wired him the money in advance, he’d let them book flights and hotel rooms to the endless parade of global crypto conferences on his credit card, in the name of accruing points. It wasn’t long before credit card issuers began shutting him down, at which point Ben phoned up Signature Bank, an obscure commercial lender his business partner had banked with for 15 years. A Signature rep materialized shortly in the company’s Chelsea co-work space and opened a real business bank account. “You are our first cryptocurrency client,” the rep casually told them.
A few months later, BCT owed Ben $150,000, the titular CEO quietly left, the real founder turned out to be a convicted Canadian felon who had served time in prison for perpetrating an $800 million Ponzi scheme, and it became abundantly clear that the “Bloomberg of blockchain” wasn’t going to be produced, nor did it need to exist. “There was something clearly wrong with every single person I was meeting,” Ben says of his travels in crypto land. “There was clearly a systematic deeper rot at the heart of all this I didn’t quite know how to process.”
He would ultimately call “the FBI and the SEC and the DOJ and any other authority I could think of.” But first, he called Signature Bank to advise it to immediately cut ties with BCT, and conduct thorough due diligence on any other crypto clients it might consider taking on. Ben is not sure who he ended up speaking with, but everyone at Signature was good at making clients feel heard; that was their thing. The rep said cheerily, “We really appreciate you letting us know.”
BY THE TIME BCT’S FOUNDERS were indicted on fraud and conspiracy charges in early 2020, Signature Bank had reinvented itself as one of the crypto-friendliest banks in America, possibly to offset an unusual slump in its previous client base, the New York City landlord class. But while the big bet had shrunk its stock price, Signature seemed to have weathered Crypto Winter all right until a hysterical billionaire bank run took out Silicon Valley Bank on March 10. Following a relentless weekend lobbying campaign led by Twitter’s most insufferable rich guys, bank regulators announced they would be invoking—with noxious irony, given that SVB had just five years earlier successfully won its emancipation from a litany of bank regulations on the premise that it was not systemically important—the “systemic risk” exception to guarantee Silicon Valley’s uninsured depositors. As almost an afterthought, they announced the closure of Signature, which had seen a run on its deposits, and the bailout of its landlords as well.
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As recently as January 2023, the bank listed the crypto exchange Binance as a client.
The two banks shared some critical traits: explosive growth during and after the pandemic, a high proportion of uninsured depositors, a large portfolio of low-interest loans to private equity and venture capital funds (turns out Signature had poached the department of SVB that doled out so-called “capital call” loans to investors in private companies in 2021), and of course, the lobbying victory of 2018, when large regional banks won exemptions from the drudgery of annual stress tests and certain capital and liquidity requirements.
But where SVB was famously insolvent, its mortgage securities having lost a third of their value to the Powell shocks, Signature was by all appearances doing OK. While SVB CEO Greg Becker cashed out $3.6 million in shares in his bank the week before the end, Signature execs bought stock on March 8 and 9, to display confidence in their institution. Why were they both taken out with the same shot?
“If on Friday they had announced the two [actions] they announced on Monday we wouldn’t have had to fail,” said former House Financial Services Committee chair Barney Frank, Signature’s longtime director, de facto lobbyist, and crisis communicator, when I talked to him last Tuesday. “That’s why I speculated that the regulators were trying to send a message about crypto. Then they came out and they said, no, it had nothing to do with crypto, it was a loss of confidence in management. Well, OK, but after they fired the CEO, who by the way had already announced he was about to step down, they didn’t make any other personnel changes. That’s why I feel puzzled.”
Frank’s suggestion that the government had ritually sacrificed Signature as a warning to any bank that dared sign up crypto customers crystallized into a narrative; one of multiple Wall Street Journal editorials voicing this perspective was titled “Signature Bank’s Crypto Execution.” I’d call the narrative a conspiracy theory—it even has a fun Q-friendly name, “Operation Choke Point 2.0”—but it also seems real. In January, the Federal Reserve, FDIC, and Office of the Comptroller of the Currency issued an unusual statement expressing “significant safety and soundness concerns with business models that are concentrated in crypto-asset-related activities.” Two weeks before the bank run, the agencies issued another statement highlighting the risks of banking crypto exchanges and stablecoin issuers. There’s good reason to praise regulators for segregating crypto from the traditional banking system, however belatedly.
Signature Bank had reinvented itself as one of the crypto-friendliest banks in America.
The thing is, Signature seemed to be playing along: unwinding relationships with Binance and Kraken, forcing CEO Joe DePaolo to step down, repeatedly telling Wall Street investors in conference calls it was de-emphasizing crypto deposits, pivoting to health care, etc.
While the notion of the “patsy” is believed to derive from an Italian word for “clown,” it’s a uniquely American feature of political and financial crises that the characters our systems hold accountable for their bottomless supply of elaborate malfeasance seem always to lean toward the implausibly clownish. A conspicuously impaired 22-year-old named Lynndie England bore responsibility for a sprawling assembly line of physical and psychological torture at Abu Ghraib while her higher-ups skated; a 30-year-old Goldman Sachs trader nicknamed “Fabulous Fab” was the most senior bulge bracket bank executive indicted in the multitrillion subprime CDO racket while his hedge fund clients walked away billionaires.
So it goes with the gargantuan phalanx of flimflammers and rug-pullers who sold America’s debt-enslaved youth on the fever dream of the blockchain. Yes, SBF is behind bars, but Peter Thiel, Doug Leone, Marc Andreessen, and the assorted other billionaires who shamelessly shilled for so many other interconnected cash-for-counterfeit schemes just orchestrated a $42 billion bank run and were instantly rewarded with an unprecedented bailout, while the same regulators who acquiesced to the VC tantrum appear to be throwing Signature’s folksy band of outer-borough bankers under the bus for the crime of giving crypto scammers a place to deposit some of those eight-figure Sequoia and SoftBank checks.
SVB’S CLIENT ROSTER HAD INCLUDED Gavin Newsom’s vineyards and Uber founder Travis Kalanick; Signature’s included the city of Syracuse, consummate Bush administration pop icons Britney Spears and Murder Inc. rap producer Irv “Gotti” Lorenzo, and thousands of taxi drivers Kalanick had disrupted into financial ruin. Rep. Frank had a kind of working-class candor about him, variously explaining his improbable post-Dodd-Frank gig as a function of his interest in affordable-housing access, his belief that bank boards ought to include advocates of regulation, and his need to make money after rejecting a congressional pension. There was even something almost sweet about the embarrassing music videos that began circulating on social media briefly after Signature went down, wherein not-terribly-photogenic company employees dance around badly furnished offices voicing—badly lip-syncing, anyway—what seems like genuine pride in a “bank that’s built to last and to enthrall.”
In fact, Signature’s whole schtick revolved around being systemically unimportant, as chairman Scott Shay articulated in a 2012 Tedx Talk called “More Banks, Fewer Problems,” in which he blamed decades of bank mergers for choking out small business. The bank’s asset base grew to $120 billion without a single major acquisition; instead, Signature constantly poached bankers away from its rivals in clumps, reasoning that their clients would follow.
Anna Delvey Sorokin, the famous faux heiress who served nearly four years in jail over the small-time check-kiting scheme that inspired the popular Netflix series Inventing Anna, briefly became a Signature client in 2017, because she wanted to rent out a historic Park Avenue museum whose owners banked there and convert it into an elite social club. “I remember they had just been named ‘Best Bank in America’ by Forbes magazine and that was a pretty big deal,” she tells the Prospect. She deposited $15,000 worth of bad checks in her account, and withdrew $8,000 before they cut her off. Prosecutors later called the two bankers who had worked on her account to testify at her grand larceny trial, but it was something of a misfire: One of them had written in an internal risk management document that Sorokin was a “real estate developer and general contractor” whose source of income was “rental income from rental apartments”—lies the bankers admitted they, not Sorokin, had concocted for no apparent reason. Later, when Sorokin attempted to pay back the $8,000 with the $320,000 she earned selling her life rights to Netflix, “they wouldn’t even accept it. I think it was really embarrassing for them.”
“Everything about the culture emphasized loyalty,” says Austin Campbell, a longtime bank executive who teaches blockchain market infrastructure at Columbia Business School. (That had famously extended to Gotti Lorenzo, whose accounts were terminated at every bank other than Signature after he was indicted in 2005 for laundering a million dollars for a drug ring known as the Supreme Team.) “I would say it seemed pretty typical of a community bank.”
Marc Cohodes would disagree. “Signature is a publicly traded crime scene,” says the veteran short-seller, who started sniffing around the bank’s operations after discovering its connection to FTX, the disgraced crypto exchange. Of course, Cohodes is friends with Overstock founder Patrick Byrne, the election-denying conspiracist who happens to run an exchange that competed with FTX. Cohodes insisted to me, “I don’t just short anyone,” only “the worst of the worst, and Signature was worthy of my efforts.” It was also lucrative; the stock had hit an all-time high of $365 in January 2022 but ended the year at $115. But it began to rally a bit at the beginning of 2023, and Cohodes, who is well known to regulators and financial journalists from previous campaigns against the subprime mortgage lender NovaStar Financial and a skin graft manufacturer called MiMedx, sent a 19-page dossier on his findings to the FDIC.
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New York Gov. Kathy Hochul addresses the banking crisis, Signature Bank, and the steps her administration will take to protect depositors in New York state, March 13, 2023.
Signature Bank’s big bet on crypto began in 2018 when it poached a team from Metropolitan Commercial Bank, which convinced Signature brass to build a “private blockchain” platform called Signet, on which customers could trade money back and forth instantaneously at all hours, without the usual lags associated with the traditional banking system. Signature wasn’t the first bank to build such a platform: California’s Silvergate, which shut down earlier this month, had built a similar service called SEN a year earlier with investment from Digital Currency Group, a thicket of crypto companies that are currently the subject of a federal money-laundering investigation. But Signature’s was the biggest: With roughly 1,500 users, Signet did a trillion dollars in volume in 2022.
The mere existence of private, blockchain-based money transfer networks raised red flags with Cohodes, who was reminded of another overvalued company he had shorted, the collapsed German payments processor Wirecard. Such a platform, he says, was bound to make Signature a haven for money launderers and fraudsters. DePaolo pitched it as a “walled garden” in which nervous customers could feel safe trading amongst themselves because everyone inside had been vetted by a bank that understood “you need to do your KYC (Know Your Customer), your AML (anti–money laundering), your BSA (Bank Secrecy Act),” as DePaolo told Bank Director magazine in 2022.
Whatever the case, Cohodes and other short-sellers allege, Signature did comically little to vet customers on its private blockchain platform. The day after the bank’s failure, news reports surfaced that the Justice Department and the Securities and Exchange Commission had been investigating Signature over exactly this issue. And glancing at a copy of Signet’s client list leaked last fall to a crypto-skeptical Substack, it’s easy to see why.
One of Signature’s first crypto clients, according to the Cohodes report, was Philip G. Potter, into whom the New York attorney general launched an investigation after the Paradise Papers leak revealed that he had secretly founded Tether, the first so-called “stablecoin,” then touted the coin on Bitfinex, a crypto exchange he owned. Signature onboarded Potter despite the recent termination of Bitfinex accounts at Wells Fargo and a video circulating on the internet in which he described “cat and mouse tricks” to avoid bank money-laundering requirements. Tether and Bitfinex are the subject of a headache-inducing number of investigations into everything from fraud to terror financing to stock manipulation.
Another early client was Bittrex, which the Treasury Department says violated sanctions and anti–money laundering laws 116,421 times between March 2014 and 2018. Signature took on the now-infamous Huobi exchanges as clients despite a 2020 report on the website Brave New Coin that revealed how security investigators had obtained accounts on the exchange using costumes and obviously fake IDs claiming to be “Borat” and “Taylor Swift”; the exchange was shut down altogether in Thailand last summer amid revelations that North Korean hackers had used the platform to steal cryptocurrency worth tens of millions of dollars. The bank listed the Latin American crypto exchange Bitso as a client, despite international news stories dating back at least to 2020 about its use in one of the world’s biggest sex trafficking rings. And as recently as January 2023, the bank also listed the elusive exchange Binance as a client, apparently shrugging off a 2020 Forbes story revealing the company’s strategy for evading detection of anti–money laundering and tax evasion authorities. And Signet touted Peter Thiel’s bankrupt crypto lending service BlockFi as a client the same month Bloomberg reported the company was the subject of a far-ranging SEC investigation.
“I kind of wonder if Signature just got overwhelmed,” says Ben, the Blockchain Terminal guy. “Once you get involved with these people, it can start to feel like they’re all showing up at your doorstep.” A hedge fund manager (not Cohodes) who says he began short-selling Signature shares during the summer of 2022 hired a private investigator to interview Signature employees about the customer vetting process, which “basically consisted of, print out the company website and put it in a file.” A crypto skeptic Substack dubbed Signet a “walled garden full of snakes.”
Signature did comically little to vet customers on its private blockchain platform.
The alpha snake, of course, was Sam Bankman-Fried, who opened some 24 accounts at Signature Bank for various shell companies. Notably, when retail investors were lured to SBF’s FTX exchange by promises that the company would somehow generate guaranteed 8.5 percent returns on their balances, all while keeping them safely stored in FDIC-insured bank accounts, the exchange directed them to wire the funds to either a Signature account listed under the name of Alameda Research, or a Silvergate account linked to a scammy-looking online storefront called North Dimension. Given that Alameda and North Dimension were unambiguously not crypto exchanges with thousands of retail customers, investors have alleged in lawsuits that the banks are liable for FTX’s $8 billion heist.
Courts in the post-Madoff era have begun to come around to that viewpoint, says an attorney working on a lawsuit against Signature over enabling the FTX fraud. Just two weeks ago, for example, Toronto-Dominion Bank offered some of his other clients $1.2 billion to settle charges that the bank assisted the $8 billion Allen Stanford Ponzi scheme, which collapsed in 2009 a few weeks after Madoff. “The key to bringing these cases is that you can’t use the word ‘red flags,’ you have to get that phrase out of your vocabulary, because it’s not enough. You have to prove they knew, and that it was their fiduciary obligation to stop it.”
THERE IS EVIDENCE THAT SIGNATURE BANK was a welcoming place for all manner of chicanery long before its C-suite discovered the blockchain. A sex discrimination lawsuit filed last December by a recently terminated Signature executive alleges that the bank turned a blind eye when two of its male executives were accused of facilitating a million-dollar wire fraud scheme. One FTX client’s lawsuit against the bank features screengrabs of various interoffice emails concerning a former bank client who was later imprisoned for perpetrating a $66 million real estate Ponzi scheme. In his exchanges with bank representatives, William Landberg repeatedly references “scrubbing” funds and issues orders for the bank to cooperate with financial transactions while bank executives circulate his requests with comments like “Madoff Ponzi,” and “Can you say, ‘kiting’?” At one point, Landberg requests—and is granted—what he terms a “John Dean meeting” with the CEO himself, Joe DePaolo.
And in 2017, a fair-housing nonprofit discovered that the bank had conspired with a shady private equity firm and a 25-year-old convicted felon named Raphael Toledano in a $70 million scheme to illegally deregulate a portfolio of rent-regulated buildings. Legislators in both New York City and Albany moved to ban the schemes, which involved extending wildly inflated mortgages with special carve-outs to straw landlords who promised to be ruthless; Signature agreed to change its ways and redouble its efforts to comply with the Community Reinvestment Act. But the new tenant protections sent multifamily-housing valuations plunging, and the FDIC, according to Barney Frank, “began telling us we needed to diversify away from multifamily housing.” You could see the great crypto conquest as a bid to do just that.
But unwinding Signature’s $20 billion rent-stabilized housing empire could bring more headaches. A brokerage president interviewed last week in The Real Deal said apartment building valuations had plunged by as much as 55 percent since 2018, first in response to the new tenant protection laws, then to the pandemic. But somehow Signature never seemed to suffer all that much, recently reporting to the FDIC that fewer than half of 1 percent of its apartment building mortgages were past due. A real estate lobbyist who banked at Signature grumbled last week that the bank “wasn’t very helpful” when it came to fighting tenant protection laws, adding that he suspected some landlords had been keeping up with their payments by taking out new loan products with Signature. Whatever the fine print, Signature’s new owner New York Community Bancorp, its erstwhile biggest competitor, which paid $2 billion last week to acquire Signature’s remaining deposits and some of its business loans, wasn’t interested in dealing with any of its commercial real estate. That could be because buying Signature’s book at a discount would force NYCB to mark down the value of its own; or it could be something more specific to the Signature way.
The godfather of Signature Bank, its founders always said, is the late Edmond Safra, the Lebanon-born founder of Republic National Bank of New York whose family had famously helped finance the Ottoman Empire caravan trade. He built Republic from a collection of neighborhood community banks, and even then his reputation was old-school. Several branches employed pianists to soothe the waiting customers, and his ATM machines did not charge fees even to other bank clients. “Edmond always said that you build a bank for the depositors and you keep high levels of capital, then you lend to those depositors,” DePaolo recalled later in an interview with Crain’s New York Business.
It’s worth noting that Safra himself was assassinated, in a mysterious 1999 arson to which one of his nurses confessed, only to later claim he had been framed and that the hit had probably been ordered by Vladimir Putin himself. A year earlier, Safra had blown the whistle to the FBI on a labyrinthine money-laundering operation that was diverting multibillion-dollar International Monetary Fund loans earmarked for Russia into an array of private bank accounts, many at his own bank. Republic was absorbed by British giant HSBC, but DePaolo and others split off to form Signature, and on a single day in April 2001 65 employees resigned from HSBC to join the new venture.
Was Signature a warning shot, or an Edmond Safra–style hit? Was it a message to banks that would dare dabble in a now disfavored industry? Or something more sinister? And with mismanagement of the basic business of banking an apparent fixture of the financial system, why was it important for Signature to meet its grave?
“Look, obviously their KYC AML wasn’t pristine. No one should have taken on FTX as a client,” says Campbell, the crypto professor, who met with Bankman-Fried as a Citigroup executive and says his answers to risk management questions “made no sense.” “But I was at JPMorgan when Bernie Madoff was one of our biggest clients. I just don’t know if anything Signature did is really out of the ordinary at your average community bank.”
