The March 2023 collapse of Silicon Valley Bank (SVB) is long enough ago that it in many ways seems like ancient history. The fact is that the bank’s failure was the second largest in U.S. history, and its collapse continues to cast a shadow over the U.S. banking industry. Private civil litigation against company executives, on behalf of investors and others, followed immediately in the wake of the bank’s collapse, but at least until now the post-collapse lawsuits have not included an action by the FDIC, as often follows after a bank failure. However, as discussed below, on December 17, 2024, the FDIC’s Board of Directors voted unanimously to authorize the agency staff’s request for authorization to file a suit against six former officers and 11 former directors of SVB and its holding company, SVB Financial Group.

FDIC Chair Martin Gruenberg’s December 17, 2024, statement regarding the staff’s recommendation can be found here. Law360’s December 18, 2024, article concerning the FDIC Board’s vote can be found here.

Background on SVB’s Collapse

Readers will recall that on March 10, 2023, the FDIC announced SVB’s closure and the agency’s appointment as the bank’s receiver, as discussed in detail here. SVB was at the time of its closure the 16^th largest U.S. bank. The bank had grown rapidly, with its total assets growing from $60 billion at the end of 2019 to $209 million at the end of 2022, meaning that the bank’s asset size more than tripled in three years. The increase in assets corresponded to an increase in deposits, which were largely invested in long-duration securities. Unusually, SVB had a high level of uninsured deposits, with about 94 percent of its deposits uninsured as of year-end 2022. (The deposits were uninsured because they exceeded the insured deposit limit under the FDIC deposit insurance program). The bank also had an unusually concentrated customer base.

The closure followed what was in effect a run on the bank. The sequence of events running up to the bank’s closure began in March 2022, when the Federal Reserve began rapidly raising interest rates. The rising interest rates caused the value of SVB’s bond holdings to decline.  The decline in the value of the bank’s bond portfolio was merely a paper loss and wouldn’t have mattered if the bank didn’t have to sell the bonds and instead held them to maturity.

Unfortunately, over the course of 24 hours preceding the bank’s closure, depositors withdrew or sought to withdraw nearly all of SVB’s deposits, causing the bank to have to sell portions of its bond portfolio at a loss. When news circulated that the bank was seeking to raise additional capital, the company’s share price declined. The share price drop triggered deposit withdrawals. When news of the withdrawals began to circulate in the Silicon Valley business community, the bank run escalated and regulators had to step in. The bank’s collapse threatened a contagion effect within the U.S. banking system, and over the following weekend banking regulators had to step in forcefully to prevent the SVB failure from triggering a systemic collapse.

The FDIC’s Investigation and Likely Claims

As Gruenberg’s statement details, when the FDIC assumes control of a bank as receiver, it has the authority to investigate and to hold directors, officers, and other professionals accountable. Units of the FDIC “investigate potential professional liability claims arising from every bank failure and pursue claims that are both meritorious and expected to be cost-effective.” The staff’s request for authority to pursue claims against SVB’s former directors and officer represents the culmination of the agency’s investigation of SVB.

In recommending that the FDIC’s board authorize litigation against the former SVB officials, Gruenberg cited three ways bases on which the agency will contend that the executives should be held liable.

First, the agency will contend that the former bank officials “mismanaged the Bank’s held-to-maturity securities portfolio by purchasing long-dated securities in a rising interest rate environment.” These purchases resulted in the breaching of key interest rate metrics and allowed over-concentration of assets far in excess of the holdings of peer banks. This investment strategy “exposed SVB to significant interest rate risk as the value of these securities declined sharply as interest rates increased.”

Second, the agency will contend that the bank officials “mismanaged the Bank’s available-for-sale (AFS) securities portfolio by removing interest rate hedges in the AFS portfolio at a time of increasing interest rates.” If the portfolio had continued to be hedged properly, the Bank, according to the FDIC, would have been protected against losses arising from rising interest rates.

Third, the agency will contend that bank officials, who simultaneously served in equivalent positions for the holding company, “permitted an imprudent payment of a bank-to-parent dividend from SVB to the holding company while the Bank was experiencing financial distress.

According to Gruenberg’s statement, as a result of the mismanagement of the held-to-maturity securities portfolio, the termination of interest-rate hedges in the available for sale securities portfolio, and the issuance of the bank-to-parent dividend, “SVB suffered billions of dollars of losses for which the FDIC as Receiver has both the authority and the responsibility to recover.” Gruenberg’s statement also reports that due to the Bank’s exposure to significant risks, resulting in its collapse, the Deposit Insurance Fund suffered losses currently estimated at $23 billion.

Discussion

In light of the Board’s vote approving the staff recommendation, we can anticipate that the agency will soon file a lawsuit against the former SVB directors and officers, likely in very short order.  As far as I know, the suit may have already been filed. The impending lawsuit will be far from the only litigation to be filed in the wake of the bank’s collapse. As I noted at the time (here), within days of the bank’s closure, plaintiff shareholders filed a securities class action lawsuit against the former bank’s executives. Other lawsuits followed.

In his statement, Gruenberg said that one of the factors the FDIC considers is whether or not filing a claim against former directors and officers of a failed bank will be “cost-effective.” As for whether the lawsuit will indeed prove to be cost effective, it is important to note that the FDIC lawsuit, when filed, will join the crowd of other lawsuits previously filed against the bank’s executives. Those other lawsuits, many of which have been pending for almost two years, undoubtedly have entailed significant costs of defense for the individual defendants. As discussed here, the bankruptcy court presiding over the bankruptcy of SVB’s holding company has already ruled that the bank’s directors and officers can tap the proceeds of the holding company’s D&O insurance program to fund their defense.  

According to reliable sources (here), the SVB holding company’s D&O insurance program consisted of a primary $10 million layer of traditional D&O insurance, followed by 15 additional layers of excess insurance, each with a $10 million limit of liability. Above this $160 million tower of traditional D&O Insurance, the SVB holding company also carried five additional $10 million layers of Side A DIC insurance, bringing the total value of the insurance tower to $210 million.

$210 million is a lot of insurance, but I suspect a material amount of this insurance has already been consumed by defense fees, and the filing of the FDIC lawsuit will even further accelerate the erosion of the available limits through the accumulation of even further defense costs. These facts put important context around the question of whether the FDIC’s lawsuit will indeed prove to be cost effective.

The potential recovery for all of the claimants, including the plaintiffs in the pending securities suits and other litigation, as well as in the forthcoming FDIC lawsuit, will be significantly affected by the rate and amount of the erosion of the limits of liability in the D&O tower due to defense expense. Given the magnitude of SVB’s collapse, the potential liability exposures involved here likely far exceed the amount of insurance. This fact puts the various claimants, including the FDIC, into a competition for a dwindling potential source of recovery. To be sure, none of the claimants, including the FDIC, are under any obligation to limit their claims solely to the remaining insurance fund. Whether and to what extent the claimants, including the FDIC, will seek to force the individual defendants to contribute to a claims settlement out of their own personal assets and resources remains to be seen.

It may have been, as I noted at the outset, a seemingly long time since SVC collapsed, but there still is a great deal of this story yet to be told.