The FDIC as receiver of the failed Silicon Valley Bank has filed a negligence and breach of fiduciary duty action against the bank’s former directors and officers. The complaint alleges that it the FDIC’s lawsuit is “a case of egregious mismanagement of interest-rate and liquidity risks by the Bank’s former officers and directors.” The complaint seeks to recover the “billions of dollars in damages caused by the negligence, gross negligence, and breaches of fiduciary duty.” A copy of the FDIC’s complaint 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 16th largest U.S. bank. The bank had grown rapidly, with its total assets growing from $60 billion at the end of 2019 to $209 billion 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 Complaint

On January 16, 2025, the FDIC as receiver filed a liability action in the Northern District of California against certain of the bank’s former directors and officers. The complaint alleges that “in the two years before the Bank failed, the Officer Defendants and Director Defendants ignored fundamental standards of prudent banking and SVB’s own risk policies in pursuit of short-term profit.” The defendants, the complaint alleges, “ignored clear warnings of risk to the Bank’s financial condition, including repeated breaches of the Bank’s own interest-rate-risk models, during a period of actual or likely increases in interest rates.” The defendants ignored the warnings “to try to boost SVBFG’s short term income and its stock price, even though doing so exposed the Bank to unreasonable risk.”

The complaint names as defendants six former SVB officers (including former CEO Gregory Becker) and eleven former SVB directors. Several of the offices (including Becker) also served as directors. Several of the director defendants served on Board committees, such as the Risk Committee and the Finance Committee.

The complaint alleges that the defendants breached their duties “in at least three ways.

First, the complaint alleges that “the Officer Defendants and seven of the eleven Director Defendants overexposed SVB to investments in long-term securities, held primarily in the Bank’s unhedged held-to-maturity (“HTM”) securities portfolio, to try to increase yield in 2021.”

Second, the complaint alleges that “from 2021 through July 2022, the Officer Defendants and the same seven Director Defendants caused SVB to terminate interest-rate hedges on its available-for-sale (“AFS”) securities portfolio.”

Third, the complaint alleges that “five of the Officer Defendants and ten of the Director Defendants were responsible for SVB’s paying a grossly imprudent $294 million bank-to-parent dividend … in December 2022—less than three months before SVB’s failure.”

The complaint has three substantive counts. The first count alleges negligence against the officer defendants. The second count alleges gross negligence against all defendants. And the third count alleges breach of fiduciary duty against all defendants. The complaint seeks to recover “actual damages in an amount to be proven” (plus pre- and post-judgment interest). As noted above, in its introductory paragraphs, the complaint expressly states that the FDIC-R seeks to recover the “billions of dollars in damages” the defendants allegedly caused.

Discussion

The FDIC’s filing of this lawsuit had been long-expected. But anticipating a potential complaint is one thing, but seeing it in print is another.

In  reading this complaint, I  was reminded of the questions I frequently get about the potential liabilities of bank directors. Anyone interested in learning more about the ways that bank directors can potentially be held liable will want to read this complaint. The specific counts of the complaint that name directors are defendants are the counts alleging that the bank negligently terminated its interest rate hedges, and that the bank’s board improperly approved a large intra-corporate dividend just months before the bank collapsed.

While the complaint boldly states that the FDIC-R seeks to recover the “billions” of losses the defendants alleged misconduct allegedly caused, whether the FDIC will in fact be able to recover even a portion of this amount remains to be seen.

As I noted in a prior post, the bank’s D&O insurance program consisted of a $210 tower of D&O insurance. This tower has already been subject to erosion (perhaps substantial erosion) as a result of various prior lawsuits that have been filed against the former SVB directors and officers. It will be further eroded as the individuals named as defendants in this lawsuit seek to defend themselves. The FDIC’s bid to try to capture whatever remains of the limits will face competition from the claimants in the other lawsuits already pending against the SVB executives.

Of course, there is always the possibility that the FDIC will also seek to recover amounts from the individuals’ personal assets. Even if some of the individuals may have substantial personal assets, it seems unlikely that the FDIC’s aggregate recoveries will amount to the “billion” it said it seeks to recover.

In any event, this lawsuit has only just been filed and it will be interesting to see how it progresses, and how it eventually turns out.