Earlier this year three large U.S. banks failed in a sequence of events that has been called The Banking Crisis of 2023. While federal regulators acted decisively and forcefully to prevent the bank failures from triggering a contagion event, the underlying problems that caused the three banks to fail continued to trouble many other U.S. lending institutions. Among the banks that faced continued challenges and continuing questions is the California-based bank Pac West, which in July 2023 announced that as a way to try to deal with its woes it was being acquired by the Bank of California. Now, a plaintiff shareholder has filed a securities class action lawsuit against Pac West and certain of its directors and officers alleging misrepresentations in connection with the events surrounding the other banks’ failures ad leading up to the July merger. The new lawsuit is the latest example of the ways in which ongoing issues in the banking sector are leading to securities class action lawsuit filings. A copy of the new complaint can be found here.

Background

Pac West Bancorp is the holding company parent of Pacific Western Bank (PWB), a regional bank based in Los Angeles. In the aftermath of the bank failures in March 2023, questions began to circulate in the media about a number of other banks including PacWest. Immediately after the SVB failure, Pac West issued a press release stating that the bank is “well-performing and well-diversified.”

However, in May 2023, about the time of the collapse of First Republic Bank, reports appeared in the media that PacWest was exploring its strategic options. In addition, the company’s share price decline nearly 40% after the Federal Reserve announced another interest rate hike. In addition, in the company’s May 2023 report on Form 10-Q, the company announced that it had lost significant percentage of its deposits. Finally, in July 2023, the company announced its intent to be purchased by the Bank of California.   

The Lawsuit

On September 11, 2023, a plaintiff shareholder filed a securities class action lawsuit in the Central District of California against PacWest and certain of its directors and officers. The complaint purports to be filed on behalf of investors who purchased the company’s securities between February 28, 2022, and May 3. 2023.

The complaint alleges that during the class period, the defendants failed to disclose to investors that: “(i) Pac West had understated the impact of interest rate hikes on PWB, a smaller bank with excessive concentration in specific industries; (ii) accordingly, the Company had overstated the stability and/or sustainability of its deposit base; (iii) as a result, Pac West was exceptionally vulnerable to excessive deposit flows and/or a liquidity crisis; and (iv) 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.

Discussion

The general perception since the bank failures earlier this year is that the worst of the banking crisis has passed. However, this lawsuit is reminder that even though there have been no further failures, weaknesses continued in the banking sector, and in at least some instances, these weaknesses have translated into securities litigation, even in the absence of bank failure. The filing of this new lawsuit now, as well as the earlier lawsuit filing against KeyCorp (discussed here), involving banks that didn’t fail but that faced some of the same questions as the banks 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.

In any event, it is worth noting that this lawsuit is the seventh 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 eight 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.