A Silicon Valley Bank investor has filed a lawsuit against top executives for their role in the bank’s sudden collapse. This lawsuit may not be the last.
It’s the first but probably not the last.
A lawsuit was filed on March 13 against top executives at Silicon Valley Bank, in particular its CEO Greg Becker and Daniel Beck, the chief financial officer, for allegedly “spreading false and misleading statements and information” regarding the failed bank’s balance sheet. .
The lawsuit is also directed against all managers who “were directly involved in the day-to-day operations of the company at the highest levels; were privy to proprietary confidential information about the company and its business and operations,” according to the 17 page lawsuit reviewed by TheStreet.
The plaintiff is also attacking the bank itself.
Lawsuit claims ‘misleading statements’
The plaintiff, Chandra Vanipenta, accused SVB executives (BLIMS) – Get a free reportnot having mentioned the risks that the increase in interest rates by the Federal Reserve (Fed) will have on your securities portfolio. Regulators shut down the bank on March 10 after depositors rushed to withdraw their funds, forcing it to sell Treasury bonds at reduced valuations.
Vanipenta asserts that the bank should have mentioned these risks in all of its financial statements related to the results of the second quarter of 2021 since Jay Powell, president of the Fed, had indicated, in a speech delivered on June 16, 2021, an upcoming change. in monetary policy.
“The 2Q21 Report did not disclose the risk that future interest rate hikes posed to the company’s business, despite the fact that the Fed indicated that it could raise interest rates in the future, and was certainly prepared to do so. in the event of rising inflation,” the report said. Plaintiff alleged in his complaint. “The 2Q21 report indicated, in relevant part, ‘there are no material changes to the risk factors set forth in our 2020 annual report on Form 10-K.'”
The company repeated, the plaintiff alleged, the same phrases in the various earnings releases and regulatory filings that followed through March 8, 2023.
“Defendants made false and/or misleading statements and/or failed to disclose that: The company failed to disclose to investors the risks posed by the impending increase in interest rates,” the lawsuit says. “The company failed to disclose to investors that, in a high interest rate environment, it would be worse off than banks that don’t cater to tech startups and venture capital-backed companies.”
He continued: “The company failed to disclose that, if its investments were adversely affected by rising interest rates, it was particularly susceptible to a run on the bank; as a result, the defendants’ public statements were materially false and/or misleading in all the relevant moments.
SVB did not immediately respond to a request for comment.
Class Action Certification Wanted
Created in 1983, Silicon Valley Bank, which billed itself as a “partner in the innovation economy,” offered higher interest rates on deposits than its biggest rivals to attract customers. The company then invested the customers’ money in long-term Treasury bonds. and strong-yielding mortgage bonds.
This strategy had worked well in recent years. The bank’s deposits doubled to $102 billion at the end of 2020 from $49 billion in 2018. In 2021, deposits increased to $189.2 billion.
But everything turned upside down when the Fed started raising interest rates, making existing bonds held by SVB less valuable. As a result, the bank had to sell the bonds at a discount to cover its customers’ withdrawals. By selling these bond positions, SVB had to take a significant loss of $1.8 billion.
Due to this loss, SVB suddenly announced that it needed to raise additional capital of $2.25 billion by issuing new common and convertible preferred shares. This decision caused panic and a bank run.
About $42 billion of deposits were withdrawn as of the end of March 9, according to a regulatory filing. As of the close of business that day, SVB had a negative cash balance of $958 million, according to the document.
“During the class period, the Company and individual Defendants, individually and collectively, directly or indirectly, disseminated or endorsed the false statements specified above, which they knew or knowingly did not know to be misleading because they contained misrepresentations and failed to disclose material facts necessary to make the statements made”, alleged the plaintiff.
According to the lawsuit, the alleged “misrepresentations” and “omissions” would tend to “lead a reasonable investor to misjudge the value of the company’s securities.”
As a result, the plaintiff hopes that his lawsuit will be transformed into a class action lawsuit and that there will be a trial.
They are seeking damages and payment of their attorneys’ fees.
The lawsuit was filed in the United States District Court for the Northern District of California by the Rosen Law Firm, which is plaintiff’s attorney.
