In my post yesterday discussing the implications of Silicon Valley Bank’s failure, I discussed the likelihood that D&O claims could arise in the wake of the failure. It has not taken long for this possibility to materialize. In morning (west coast time) on Monday, March 13, 2023, a plaintiff shareholder filed a securities class action lawsuit against SVB’s parent holding company and two of its executives. As discussed below, this lawsuit is likely just the first of what undoubtedly will be many D&O lawsuits against the company and its executives. A copy of the new complaint can be found here.
As I discussed in detail in yesterday’s post, California’s state banking regulator closed Silicon Valley Bank on Friday, March 10, 2023, and the FDIC was named as the bank’s receiver. On Sunday, March 12, 2023, the FDIC, the Federal Reserve Board, and the Department of Treasury issued a joint statement in which the agencies confirmed that “Depositors will have access to all of their money starting Monday, March 13,” a move designed to try to reassure financial markets and to avoid a banking crisis. Among other things, the joint statement also pointedly emphasized that “Shareholders and certain unsecured debtholders will not be protected. Senior management has also been removed.” These statements underscored that shareholders are going to be the big losers, and suggested that senior management was to blame for the bank’s collapse.
Given the sequence of events, it is arguably unsurprising that on Monday morning after the bank’s Friday closure, a plaintiff shareholder filed a securities class action lawsuit in the Northern District of California against SVB Financial Group (the parent holding company of Silicon Valley Bank); Greg Becker, the company’s CEO; and Daniel Beck, the company’s CFO.
The complaint purports to be filed on behalf of a class of investors who purchased the company’s securities between June 16, 2021 and March 10, 2023. The complaint alleges that during the class period, “(1) the Company failed to disclose to investors the risks presented by impending rising interest rates; (2) the Company failed to disclose to investors that, in an environment with high interest rates, it would be worse off than banks that did not cater to tech startups and venture capital-backed companies; (3) the Company failed to disclose that, if its investments were negatively affected by rising interest rates, it was particularly susceptible to a bank run; (4) 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 short 17-page complaint in the new lawsuit shows signs of having been put together in a hurry. The plaintiffs’ lawyers clearly wanted to get the complaint on file as quickly as possible, to try to capture whatever advantages might be available for being the first to file. However, I strongly suspect this will not be the only securities suit to be filed. One thing I will be watching for is to see whether one of the leading plaintiffs’ securities firms representing a large institutional investor gets into the fray by filings their own complaint. Moreover, there is still the possibility of the FDIC as receiver filing its own breach of fiduciary duty lawsuit against the bank’s former executives.
One question that follows in the wake of a lawsuit like this is whether this will be the only suit of its type, or whether there might be others yet to come – will there be more failed bank-related securities suits to come, involving different failed banks? For example, in addition to SVB’s closure on Friday, over the weekend the banking regulators also closed Signature Bank. The possibility of lawsuit against Signature Bank and its executives obviously is on the table as well. Whether it goes beyond that depends on whether there are other banking failures ahead. The dramatic steps the Treasury Department and the Fed took over the weekend were clearly designed to try to head off a banking crisis, but whether it will be enough to forestall further bank failures remains to be seen.
There is at least one other point here that should not be lost; it is a point that I also made in my post over the weekend about SVB’s failure, which is that SVB’s failure was in effect a consequence of rising interest rates. It should not be overlooked that this lawsuit itself is really due to rising interest rates, and the plaintiff’s allegations on their own pretty much make that point.
In my recent year-end wrap up of the top D&O stories of 2022, I highlighted the fact that certain macroeconomic factors (such as rising interest rates, economic inflation, labor supply disruption, and the war in Ukraine) were weighing on companies, in ways that could affect the companies’ operations and financial performance, that could in turn lead to securities litigation. I have been asked since I published that piece how economy-wide phenomena such as rising interest rates or economic inflation could translate into a D&O lawsuit directed against a specific company. This new lawsuit is a concrete example of the ways in which rising interest rates can affect a company, and how those effects in turn can translate into a securities suit.
SVB is not the only company in a vulnerable position due to rising interest rates. Other companies in a wide variety of interest rates have a similar exposure owing to interest rate sensitivity. However, it is not just companies in interest rate sensitive businesses that are vulnerable because of rising interest rates. Companies that loaded up on debt when interest rates were low now face the prospect of having to refinance at a time when interest costs are much higher, increasing operating costs and compressing margins. Whether the Fed will continue to raise interest rates as the year goes forward remains to be seen, but there is no doubt that the much-altered interest rate environment in which companies now find themselves creates a very different set of circumstances. Among other things, these differences could entail an increased litigation risk as well.
The final question and the one all of us will have to watch unfold over the coming days, weeks, and months, is whether there will be further bank failures to come. As I write this, the share prices of many regional banks have fallen during trading today to an extent that suggests that the market has concerns about those banks’ survivability. It could be that the market is sweeping with too broad of a brush; certainly, not all of the banks whose share prices are down today are at risk of failing. On the other hand, investors, depositors, and regulators are all going to be watching very closely, to see what may happen next.
In the meantime, while we wait, the one thing I think everyone can count on is that there will be further lawsuits ahead arising out of the SVB failure.