Silicon Valley Bank: A Legal and Financial Mess

Silicon Valley Bank (SVB), now known as the second largest bank to fail in American history, was once the go-to bank for startups and technology companies. In fact, almost half of all startups funded by venture capital used SVB to deposit their funds. The bank became the 16th largest in the United States, with hundreds of billions of dollars in assets. Critically, however, the vast majority of those deposits exceeded the $250,000 limit set by the Federal Deposit Insurance Corporation (FDIC). Any deposit below this limit would be insured in the event of a bank failure, but many of SVB’s depositors held millions of dollars in their accounts. This would have spelled doom for SVB and panic among depositors and investors, but the FDIC has stepped in to provide all depositors their funds, whether they were insured or not. 

While the depositors of SVB may be saved, the chief officers are far from it. The Department of Justice (DOJ) and Securities and Exchange Commission (SEC) are investigating them for insider trading after they took action to sell their stakes in SVB before its collapse. They are also facing a civil matter in the form of a class action lawsuit filed by SVB’s shareholders, which alleges that they were not sufficiently informed of the risk of the company’s stock.

To understand the legal issues at play with SVB, it is necessary to understand how it collapsed. It started when SVB invested a large amount of its deposits into long-term government Treasury bonds, which essentially provide a safe stream of payments for 20 to 30 years. The prices of these bonds are inversely related to and heavily dependent on the current interest rate, which is set by the Federal Reserve, known as the Fed. When SVB purchased these bonds, interest rates were quite low, so bond prices were high. These bonds would have been an almost guaranteed safe return, but the Fed hiked interest rates to fight inflation. Increased interest rates led to significantly lowered bond prices and a massive fall in value for SVB’s portfolio. 

At the same time, a few of SVB’s depositors needed to withdraw their funds, but SVB did not have enough cash on hand to accommodate them. SVB resorted to selling some of its bond holdings to provide the necessary cash for the withdrawals. Since the market value of those bonds had fallen, SVB had to sell them at a loss of $1.8 billion. This loss grew exponentially as the market lost faith in the bank and its value dropped by a staggering $160 billion. A bank run ensued, whereby panicked depositors tried to withdraw their money from their accounts, and it was worsened by the fact that these deposits were uninsured. At this point, SVB was helpless to repay its depositors, so it collapsed, causing shockwaves throughout the financial industry. 

While the FDIC is working to make SVB’s depositors whole, it is not doing so for its shareholders. One result of this is the filing of a class action lawsuit against SVB’s parent company called Vanipenta v. SVB Financial Group, et al. Chandra Vanipenta, a shareholder of SVB, purchased $12,000 of SVB stock between June, 2021 and March, 2023. He is alleging that Gregory Becker and Daniel Beck, the CEO and CFO of SVB, failed to properly inform investors of SVB’s vulnerability to interest rate hikes with regard to its large holding of Treasury bonds. 

Vanipenta’s case contains details from the various financials filed by SVB to the SEC, such as its quarterly and annual reports, throughout the period in question. For each one, Vanipenta holds that the statement “understated the risk” faced by SVB “by not disclosing that likely interest rate hikes had the potential to cause irrevocable damage.” Interestingly, the statements do say an increase in the interest rate would be detrimental and could “‘jeopardize’” SVB’s financial position, but they do not mention the possibility of a bank run. All of these statements were signed for veracity by Becker and Beck. Vanipenta claims that by signing off on these statements, SVB and its chief officers knowingly omitted a “material fact” investors would find useful in determining whether to buy SVB stock. This is a violation of rule 10b-5 of the Securities Exchange Act of 1934. If the Northern District Court of California rules in favor of Vanipenta, then the class of plaintiffs will be entitled to damages. 

This lawsuit is not the only legal matter facing Becker and Beck. It is common for bodies such as the DOJ and SEC to investigate banks when they fail, and SVB is no exception. Taken at face value, these investigations seem to be procedural, and nothing more. The DOJ and SEC are, however, also looking into stock sales made by Becker and Beck. Massachusetts regulators are also looking into these stock sales due to SVB’s 2021 acquisition of Boston Private Bank. Both men sold a significant portion of their stock on February 27th, with Becker netting almost $2.3 billion and Beck $575,000. Shortly thereafter, SVB collapsed. The suspicion is that Becker and Beck had insider information about SVB’s risk.

Rule 10b-5 of the Exchange Act targets insider trading and only allows insiders such as Becker and Beck to sell stock under specified plans. The plans must be filed 30 days before the stock sale to prevent insiders from utilizing information that is not publicly available in their trading decisions. Becker and Beck both used the appropriate plans to sell their stock. Interestingly, though, the SEC extended the waiting period before insiders’ trades can be executed to 90 days, and the change went into effect on the exact day that Becker and Beck sold their shares. Since Becker and Beck filed their plans to sell before the 90 day waiting period was implemented, they cannot be prosecuted ex-post facto. The main point of interest, then, for investigators will be whether the plans to sell the stock were entered into in good faith by Becker and Beck and whether they had advanced knowledge of SVB’s vulnerability. 

Both of these issues, therefore, are intertwined. In the Vanipenta lawsuit, it is alleged that Becker and Beck deliberately withheld information regarding SVB’s risk due to interest rate hikes from the Fed. The insider trading investigations are looking to determine whether these men had such information and used it to profit at the expense of their investors. If evidence comes to light that Becker and Beck did have access to this information, they would be liable for damages in the Vanipenta case. They would also face the possibility of incarceration or large criminal fines payable to the SEC. Similar stakes are being faced by the executives of other banks such as First Republic, which fell victim to the contagion effects of SVB’s collapse. Consequently, the banking industry as a whole is facing heightened scrutiny from regulators as investigations similar to those aforementioned are becoming increasingly common. This adds to the uncertainty facing the industry as depositors flock to bigger, perceivedly safer banks. One must act with caution, however, as it was these “too big to fail” banks that catalyzed the 2008 Financial Crisis.

Nicholas Duffy is a junior at Brown University, concentrating in Business Economics. He is a staff writer for the Brown Undergraduate Law Review and can be contacted at nicholas_duffy@brown.edu.