Earlier this year, challenges arising from rising interest rates, as well as concerns surrounding liquidity and other issues, led to three of the largest banking failures in U.S. history. The three that failed were not the only banks facing challenges in the rising interest rate environment, and while there have been no further failures since May, questions from the turbulence earlier this year remain for many banks. Now, in a sign that these kinds of challenges and questions can lead to securities litigation even in the absence of bank failure, a plaintiff shareholder has filed a securities class action lawsuit against KeyCorp (the bank holding company of KeyBank) after questions about the bank’s liquidity and interest rate income in a rising interest rate environment caused a drop in the company’s share price. A copy of the August 4, 2023, complaint filed against Key can be found here.
KeyCorp is the holding company of KeyBank. One of KeyBank’s principal sources of income is net interest income (NII) which represents the difference between interest income on earning assets (such as loans) and loan-related fee income, on the one hand, and interest expense on deposits and borrowings, on the other hand.
The complaint alleges that on March 6, 2023 (that is, just days before the SVB collapse), Key executives made a presentation at an investor conference, in which the company disclosed that it was revising downward its FY 2023 guidance due to a significant reduction in the company’s anticipated NII. The company explained its revised guidance by saying that “marginal funding costs are increasing with rising market interest rates and are expected to weigh” on NII.
The complaint alleges further following the failures of SVB and Signature Bank, “investors grew increasingly concerned about Key’s own liquidity.” Securities analysts lowered their ratings on KeyCorp’s stock, causing a sharp drop in the company’s share price. (The share prices of many banks declined during this same period.)
On June 12, 2023, the company CFO, speaking another investor conference, disclosed that the company anticipated that the company’s 2Q23 NII would be softer than earlier expected “based on the funding mix and deposit cost pressures.” At the same conference, the company’s CEO disclosed that clients are demanding higher interest rates on their deposits, and that banks of Key’s size are likely facing higher capital and liquidity requirements. According to the complaint the company’s share price fell on this news.
On August 4, 2023, a plaintiff shareholder filed a securities class action lawsuit in the Northern District of Ohio against Key, its CEO, its current CFO, and its previous CFO. The complaint purports to be filed on behalf of a class of investors who purchased Key’s securities between the period February 27, 2022 and June 9, 2023.
The complaint alleges that during the class period: “(i) Key downplayed concerns with its liquidity while overstating the effectiveness of its long-term liquidity strategy; (ii) Key overstated its projected NII for the second quarter (Q2) and full year of 2023, as well as related positive NII drivers, while downplaying negative NII drivers; (iii) as a result, Key was likely to negatively revise its previously issued NII guidance; (iv) all the foregoing, once revealed, was likely to negatively impact Key’s business, financial results, and reputation; and (v) 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.
With the passage of time since the bank failures earlier this year, a general perception has emerged that the worst of the banking crisis of 2023 may be over. But even with the perception that the crisis has passed, lingering questions remain that there could be more of the story to be told (as I detailed in a recent blog post, here). The filing of this new lawsuit now, involving a bank that didn’t fail but that faced some of the same questions as the bank’s that did fail, highlights the fact that even if there are no further bank failures (at least for now), there could be still further litigation against banking institutions that face questions about the impact of the rising interest rates on the bank’s liquidity and profitability.
Indeed, the questions banks now face are not limited to those raised with respect to Key. Other questions banks may face in the current environment include levels and amounts of uninsured deposits; sector concentration; and significant exposure to a deteriorating commercial real estate marketplace. Just as the questions Key faced earlier this year led to this lawsuit, banks facing these other kinds of questions could also face the possibility of securities litigation.
While the lawsuit has only just been filed against Key, and it remains to be seen how the lawsuit will fare, it does seem likely that the plaintiffs will face an uphill battle in this case. Even in the plaintiff’s telling, nothing more seems to have happened here than that the company adjusted its guidance as it absorbed the consequences of a deteriorating banking environment. The plaintiff will face significant challenges establishing falsity. When the time comes, the court will have to look long and hard to find anything that constitutes sufficient allegations of scienter. And the drop in Key’s share price following the SVB collapsed hit the shares of many banks at the same time.
In any event, it is worth noting that this lawsuit is the sixth securities class action lawsuit to be filed this year related to the 2023 banking crisis. (If you include the securities suit that was filed against Silvergate Bank in December 2022, you could say there have been seven securities suits arising out of the banking crisis). Whether or not there will be more banking crisis-related securities suits filed this year, it does seem that the banking-related suits are a factor in the overall number of securities suits filed this year.