FDIC considers lawsuit against ex-SVB executives

Bloomberg News

The Federal Deposit Insurance Corp. board voted Tuesday to explore a lawsuit against six former officers and 11 unnamed former directors of Silicon Valley Bank for mismanagement that led to the bank's failure. 

According to a statement by Chairman Martin Gruenberg, the FDIC seeks to sue these individuals — who were not named by the agency — for their role in mismanaging SVB's investment portfolios, which exposed the bank to substantial risks, incurred billions of dollars in losses and ultimately resulted in an estimated $23 billion loss to the FDIC's Deposit Insurance Fund. The board voted unanimously to start consideration of legal action, which will be reviewed by the FDIC's Professional Liability and Financial Crimes Section and the Division of Resolutions and Receiverships, which can "pursue claims that are both meritorious and expected to be cost-effective," according to Gruenberg. 

"SVB's former directors and officers, who simultaneously served in equivalent positions for the holding company, SVBFG, permitted an imprudent payment of a bank-to-parent dividend from SVB to the holding company while the Bank was experiencing financial distress," Gruenberg said in an FDIC release. "SVB suffered billions of dollars in losses for which the FDIC as Receiver has both the authority and the responsibility to recover."

SVB, based in San Jose, California, and founded in 1983, primarily served businesses backed by venture capital. 

By the end of 2022, the bank reported $209 billion in assets and $191.4 billion in deposits. However, its rapid growth concealed significant risks, including a heavily concentrated customer base and an alarming 94% of deposits being uninsured, as noted by regulators.

These vulnerabilities came to a head in March 2023 when a surge of depositors rushed to withdraw funds. This forced SVB to sell securities at a loss, triggering its collapse within just 24 hours. The fallout created instability across the banking sector, prompting federal agencies to step in and declare a systemic risk exception to cover the bank's uninsured depositors and contain a broader deposit run.

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The FDIC's investigation into the collapse — culminating in the decision to consider legal action — revealed significant failings in SVB's risk management practices, the agency said. According to the agency, the bank's former leadership allowed excessive exposure to long-term securities in a rising interest-rate environment, removed crucial safeguards against interest-rate fluctuations and authorized what the FDIC says were imprudent dividend payments to the parent company during financial distress. These decisions compounded SVB's losses, and the lawsuit being considered by the FDIC would aim to recover these damages.

Earlier Tuesday, FDIC board member and CFPB Director Rohit Chopra floated the idea of considering system-wide restrictions on stock dividends and share buybacks during bank stress, arguing such payouts deplete capital needed to absorb losses and support lending, as seen in crises like Silicon Valley Bank's collapse, where he says pre-crisis capital distributions left the bank ill-prepared to withstand depositor runs.

Consumer advocacy group Better Markets praised the FDIC for taking steps to hold bank executives accountable for alleged mismanagement and reckless behavior that drove the bank's collapse. 

"The needless and avoidable collapse of SVB precipitated a banking crisis, led to a $23 billion loss to the deposit insurance fund and cost Americans as much as 1% of lost GDP due to the contagion and resulting credit contraction," they wrote in a release. "Banks don't neglect their duties, act recklessly, engage in high-risk behavior, or break the law — bankers do and that will continue unless and until individual bankers are meaningfully and personally punished."