By Monday morning of this week, two banks had failed in quick sequence, including the very high-profile collapse last week of Silicon Valley Bank (SVB) and the closure over the weekend of Signature Bank. SVB got hit with a securities class action lawsuit yesterday, so what had to happen next? Why, a securities suit against Signature Bank, of course. On Tuesday morning, the same plaintiffs’ law firm that sued SVB on Monday filed a separate securities class action lawsuit against Signature Bank and three of its executives. How much further any of this goes from here is the question on everyone’s minds. A copy of the Signature Bank complaint can be found here.
Signature Bank was a commercial bank based in New York. The bank had extensive business in the real estate sector. Beginning in 2018, it made a deliberate play to try to attract deposits from cryptocurrency-related businesses. Similarly to SVB, Signature had a very significant amount of uninsured deposits; according to the New York Times (here), Signature had uninsured deposits of nearly $80 billion, representing nine-tenths of its total deposits.
On Sunday, March 12, 2023, Signature was closed by the New York state banking regulator and the FDIC was appointed as the bank’s receiver. The closure of Signature, which had assets of over $110 billion, represented the third-largest bank failure in U.S. history.
In some ways, Signature’s demise was triggered by SVB’s failure. As the news began circulating last week about concerns at SVB, depositors at Signature bank became concerned about their deposits there as well. On March 9, 2023, in response to increasing withdrawals, Signature issued a press release intended to reassure investors about the bank’s stability and solvency. The press release stressed the bank’s limited exposure to digital-asset related deposits.
However, on Friday, March 10, 2023, after news of SVB’s closure began to circulate, depositors at Signature, according to the New York Times (here), “panicked” and they began to demand to withdraw their money from the bank. According to CNBC (here), depositors withdrew over $10 billion from Signature on Friday. Signature’s share price tanked as well.
On March 14, 2023, a plaintiff shareholder filed a securities class action lawsuit in the Eastern District of New York against Signature Bank; Joseph DePaolo, who was the bank’s CEO until March 12, 2023; Stephen Wyremski, who what the bank’s CFO; and Eric Howell, who was the bank’s President and COO. The complaint purports to be filed on behalf of investors who purchased the company’s securities between March 2, 2023, and March 12, 2023.
The complaint alleges that during the class period, the defendants made false and misleading statements or failed to disclose to investors that: “(1) Signature Bank did not have the strong fundamentals that it represented itself as having in the days immediately prior to the takeover, or otherwise took action that left is susceptible to a takeover by the New York Department of Financial Services (DFS); (2) as a result, it became a target for regulatory action by the DFS, and (3) as a result, Defendants’ public statements were materially false and/or misleading at all relevant times.”
The complaint alleges that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The complaint seeks to recover damages on behalf of the plaintiff class.
The plaintiffs’ law firm that filed this new lawsuit – The Rosen Law Firm – is the same firm that filed the securities class action lawsuit on Monday against SVB. The firm’s lawyers clearly are moving rapidly to try to capture whatever the benefit may be for them from being the first to file, in both cases. As was the case with respect to the SVB lawsuit, I suspect that this first-filed complaint in the Signature Bank lawsuit will not be the only D&O lawsuit filed in connection with the Signature Bank closure. In addition to further securities suits, there is also the possibility of the FDIC, acting as receiver for the failed banks, to file breach of fiduciary duty lawsuits against the bank’s former management.
While it is unsurprising that this lawsuit has been filed given the high-profile nature of the underlying circumstances, and given the fact that the company’s shareholders have lost the entire value of their investment, there are still interesting and unusual features of this new lawsuit.
For starters, the class period is surprisingly short. Though it is ten calendar days long, it is only six business days long. The other thing about the time-period reflected in the class period is that during that time most of the transactions in the company’s stock consisted of stock sales, not stock purchases. I suspect strongly that the investors who held the company’s shares at the end – and who lost the entire value of their investment – purchased their shares prior to the proposed class period. The damages calculation in this case is going to look more than a little bit unusual.
Another curious thing about this lawsuit is that the complaint names as defendant the bank itself, rather than its publicly traded holding company. The bank is in receivership, so there really wouldn’t seem to be much of a point to suing the bank. Given the receivership, I would have expected the complaint to have been filed against the holding company, on whose behalf the supposedly misleading statements supposedly were made, after all. I am sure the plaintiffs’ lawyers had a good reason for doing it this way; just the day before, the same lawyers did file the prior lawsuit against SVB’s holding company, rather than against SVB, the bank. I am sure there is a good reason why the plaintiff’s lawyers here sued the bank rather than the holding company.
So now we have a one for one relationship: two failed banks and two securities class action lawsuits. By that measure, the answer to the question of whether there will be further failed bank-related securities suits file depends on whether or not there are going to be further bank failures. The federal government’s strong moves on Sunday evening may have gone a long way to trying to head off the kinds of bank runs that led to the demise of both SVB and Signature Bank. I would very much like to believe that is the case.
However, as I have told everyone that would listen to me over the last two or three days, when Baer Stearns failed in March 2008, everyone hoped that was the end of the problem. It wasn’t until six months later, in September 2008, that Lehman Brothers failed, setting off a cascade of events that triggered what we now call the Global Financial Crisis. That sequence of events from that earlier time should make us very modest about sounding the “all clear” signal just yet. We can hope the worst is past, but because of what happened in 2008, I think we should all take a deep breath and settle in to await events, with a watchful and wary eye.