Silicon Valley Bank (SVB) and its top officers face a proposed class action lawsuit filed in California as the dust continues to settle from the major institution’s collapse last week.
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The 17-page securities complaint against SVB Financial Group, CEO Greg Becker and CFO Daniel Beck alleges the bank, the 16th-largest in the United States and one of the top financial institutions in California’s Silicon Valley, falsely and/or misleadingly represented, or failed to disclose, to investors that the current high-interest-rate climate posed an existential risk to the bank, more so than banks that did not cater to tech startups and venture capital-backed companies. Further, SVB and its execs were not upfront with investors with regard to the fact that, if the institution’s investments were hurt by rising interest rates, SVB was “particularly susceptible to a bank run,” the filing alleges.
The defendants are accused of having violated the federal Securities Exchange Act of 1934, in particular by failing to disclose in 2021 and 2022 financial reports “the risk that future interest rate hikes posed” to SVB’s business, despite the Federal Reserve having signaled as early as June 2021 that it might raise interest rates in the future and was “certainly prepared to do so in the event of rising inflation.”
Instead, the defendants indicated that SVB faced risk factors no different than those disclosed to investors in its 2020 annual report, the suit adds.
According to the lawsuit, the truth began to emerge in a March 8 press release, wherein SVB “triggered immediate concerns” about its ability to continue to function—and about the safety of client deposits.
“On this news the price of the Company’s stock lost more than half of its value from a closing price of $267.83/share on March 8, 2023 to $106.04/share on March 9, 2023,” the filing reads, noting that SVB’s collapse was the largest bank failure since the 2008 financial crisis.
From there, the suit continues, it quickly became evident that the “liquidity crisis” that preceded SVB’s implosion stemmed from rapidly rising interest rates. On March 9, the Wall Street Journalreported, in part, that broad drops in stock price across the bank sector that day were “another consequence of the Federal Reserve’s aggressive campaign to control inflation.” In that same article, the lawsuit says, the WSJ stated that SVB’s assets and deposits, which almost doubled in 2021, were in large part poured into U.S. Treasuries and other government-sponsored debt securities, which eventually harmed the bank as the Fed began to raise interest rates.
On March 10, trading of SVB shares was halted, “essentially rendering the Company’s shares illiquid and valueless given the bank’s failure,” the lawsuit relays. The same day, the California Department of Financial Protection and Innovation took charge of SVB after the bank was unsuccessful in finding a buyer, with SVB’s roughly $175 billion in customer deposits transferred to the Federal Deposit Insurance Corporation (FDIC), the case shares.
Upon taking over SVB, the California Department of Financial Protection and Innovation found that the bank’s liquidity position was “inadequate,” and that it “cannot reasonably be expected to pay its obligations as they come due,” the suit says. The department also found SVB to be insolvent and determined that it was “conducting its business in an unsafe manner due to its present financial condition,” the complaint states.
The lawsuit looks to represent all persons and entities who bought or otherwise acquired publicly traded Silicon Valley Bank securities between June 16, 2021 and March 10, 2023, inclusive of both dates.
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