Svb's Legal Troubles: What Laws Were Broken?

The collapse of Silicon Valley Bank (SVB) in March 2023 has raised questions about whether its executives broke any laws. SVB was the third-largest bank failure in US history and the largest since the 2007-2008 financial crisis. The failure of the bank, which held about \$209 billion in assets in December 2022, was caused by several factors, including a decrease in the value of its investments and large withdrawals by depositors. In the aftermath of the collapse, federal regulators promised to compensate all depositors, even those with uninsured funds. The US Department of Justice (DOJ) and the Securities and Exchange Commission (SEC) launched an investigation into whether SVB executives violated civil or criminal laws. Senators Elizabeth Warren and Richard Blumenthal requested a comprehensive probe, citing a pattern of risky and questionable decision-making by SVB officials. The inquiry will examine stock sales conducted by SVB executives before the bank's collapse.

Did SVB violate self-dealing rules?

On March 10, 2023, Silicon Valley Bank (SVB) collapsed following a bank run, marking the third-largest bank failure in US history and the largest since the 2007-2008 financial crisis.

In the aftermath of the collapse, SVB faced scrutiny for its management practices and decision-making. This included questions about whether SVB executives violated self-dealing rules, disclosure requirements, fiduciary duties, or insider trading rules.

SVB was criticized for its failure to address liquidity and interest-rate modeling weaknesses identified by the Federal Reserve as early as November 2021. The bank's management also failed to implement recommended changes to stress testing to capture a wider range of risks and channels for contagion. These deficiencies in risk management and supervision contributed to SVB's instability and eventual collapse.

SVB executives were also accused of providing preferential treatment to the bank's founders, including low-interest mortgage loans, oversized pay, and bonuses. Additionally, SVB lobbied Congress for exemptions from federal oversight regulations.

In the wake of the collapse, Democratic Senators Elizabeth Warren and Richard Blumenthal requested that the Department of Justice (DOJ) and the Securities and Exchange Commission (SEC) investigate whether SVB officials involved in the failure met their statutory and regulatory responsibilities or violated civil or criminal law. The inquiry will examine stock sales conducted by SVB executives before the bank's collapse.

While the investigation is ongoing, SVB's collapse has highlighted the need for improved regulatory oversight and risk management in the banking industry to prevent similar incidents from occurring in the future.

Did SVB break disclosure requirements?

On March 15, 2023, Democratic senators Elizabeth Warren and Richard Blumenthal asked the Department of Justice (DOJ) and the Securities and Exchange Commission (SEC) to investigate whether Silicon Valley Bank (SVB) executives had violated any laws, including disclosure requirements. This followed SVB's collapse on March 10, 2023, which marked the third-largest bank failure in US history.

SVB's failure was precipitated by a bank run, during which customers withdrew $42 billion in funds within a day. This was triggered by the announcement that SVB had sold over $21 billion worth of its investments, borrowed $15 billion, and would hold an emergency sale of its stock to raise $2.5 billion. The bank's financial situation was further exacerbated by its failure to adequately hedge against rising interest rates, which resulted in unrealized losses on its portfolio.

In their letter to the DOJ and SEC, Senators Warren and Blumenthal requested a comprehensive investigation into the Federal Deposit Insurance Corporation's (FDIC) takeover of the failing bank and "whether senior bank executives and other key officials involved in the collapse met their statutory and regulatory responsibilities or violated civil or criminal law."

SVB's collapse had significant consequences, particularly for startup companies, many of which were briefly unable to withdraw money from the bank. The failure also disrupted the operations of SVB Financial Group, the bank's holding company, which was locked out of its shared headquarters and had to relocate to its New York City offices.

While the specific details of any potential violations by SVB executives have not been disclosed, the inquiry will reportedly include an examination of stock sales conducted by these executives before the bank's collapse.

It is worth noting that the investigation into SVB's collapse is ongoing, and no conclusive evidence has been presented regarding any breach of disclosure requirements by the bank's executives.

Did SVB breach fiduciary duties?

The question of whether SVB breached fiduciary duties is a complex one and was the subject of an investigation by the Justice Department and the Securities and Exchange Commission (SEC).

SVB's parent company, SVB Financial Group, was engaged in a legal dispute with the Federal Deposit Insurance Corporation (FDIC) over allegations that it aided and abetted and conspired in breaches of fiduciary duties by SVB directors and officers. The FDIC asserted that SVB Financial Group's mismanagement of its securities portfolio, specifically its failure to properly hedge and remove interest rate hedges, increased its stock price and management compensation to the detriment of SVB. The FDIC also claimed that SVB engaged in the payment of improper dividends and the sale of equity warrants at below market value, resulting in damages of at least $294 million and $130 million, respectively.

In addition to the FDIC's allegations, Senators Elizabeth Warren and Richard Blumenthal asked the Justice Department and the SEC to investigate whether SVB executives violated any self-dealing rules, disclosure requirements, fiduciary duties, or insider trading rules before the collapse. They accused SVB executives of giving preferential treatment to the bank's founders, including low-interest mortgage loans and oversized pay and bonuses.

While the investigation by the Justice Department and the SEC did not specifically mention breaches of fiduciary duties, the inquiry will look into stock sales conducted by SVB executives ahead of the bank's collapse. This suggests that the investigation will encompass a broad range of potential legal and ethical violations, including breaches of fiduciary duties.

The collapse of SVB and the subsequent investigations highlight the complex nature of fiduciary duties and the potential consequences of breaching those duties. While the full extent of SVB's actions may not be known until the completion of the investigations, the allegations and inquiries suggest that SVB's actions may have contributed to the breach of fiduciary duties owed to its clients, shareholders, and other stakeholders.

Did SVB engage in insider trading?

On 15 March 2023, top Democratic lawmakers, Senators Elizabeth Warren and Richard Blumenthal, asked the Justice Department and the Securities and Exchange Commission (SEC) to open a probe into whether Silicon Valley Bank (SVB) officials involved in the bank's collapse violated civil or criminal law.

SVB's failure was the largest by assets of any bank since the 2007-2008 financial crisis and the second-largest failure of an FDIC-insured bank. The bank's collapse was due to its inability to adequately hedge against rising interest rates.

SVB's CEO, Greg Becker, and CFO, Daniel Beck, were dismissed from their roles on Friday, 10 March 2023. Becker and Beck had sold shares worth roughly $3 million and $575,000, respectively, two weeks before the bank's collapse. These sales were conducted via 10b5-1 plans, which allow insiders of publicly traded corporations to set up a trading plan for selling stocks they own by establishing a predetermined number of shares to be sold at a predetermined time. While the probes may not lead to allegations of insider trading, one possible problem for both executives ties to the proposed capital raise that SVB announced the same week its clients began moving their money out of the bank.

SVB executives and directors cashed out $84 million worth of stock in the two years preceding the bank's collapse, according to Smart Insider data.

Did SVB mismanage interest rate and liquidity risk?

The collapse of Silicon Valley Bank (SVB) has been attributed to the mismanagement of its balance sheet and a failure in liquidity management. SVB's liabilities were largely in the form of short-term demand deposits, while its assets were mostly long-term bonds, such as US Treasury securities and mortgage-backed securities. As a result, SVB was taking in cash via short-term deposits and investing these funds in longer-term financial instruments.

During the pandemic, SVB saw a large inflow of corporate deposits. Instead of discouraging this or investing the funds in assets of matching maturity, SVB chose to invest them in low-credit-risk, long-maturity bonds. This created a maturity mismatch between its assets and liabilities, which was significantly altered by the Federal Reserve's interest rate hikes in 2022. As interest rates rose, the value of the long-term bonds in SVB's portfolio declined, leading to a direct negative effect on their net asset base.

SVB failed to address this maturity mismatch and effectively hedge against interest rate risk. Standard practice for a well-managed bank would have been to purchase fixed-for-floating interest rate swaps, which would have protected them from market risk due to rising interest rates. This type of hedging is a basic practice in the financial industry, and SVB's failure to implement it left them heavily exposed to a bank run.

SVB's mismanagement of interest rate and liquidity risk was further exacerbated by its high concentration of corporate deposits, which are less "sticky" than retail deposits, increasing the risk of deposit flight. This combination of factors ultimately led to SVB's collapse, highlighting the need for proper risk management and regulatory oversight in the banking industry.

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