Investigation of failed bank opens
Stock sale by executives called potential focus of probe
The Justice Department has opened an investigation into the collapse of Silicon Valley Bank, two people with knowledge of the matter said. The investigation is in its early stages, and it is unclear what federal prosecutors are focused on, one of the sources said.
A Justice Department spokesman declined to comment. One potential focus is expected to be sales of company shares by several bank executives in the weeks before the bank’s failure, several legal experts said.
The sales generated millions of dollars in proceeds, although some of the bank’s executives sold stock pursuant to insider selling plans that set the timing of such sales in advance. Such plans are set up by corporate executives to avoid the appearance of trading on confidential information.
For example, under a prearranged plan, Silicon Valley Bank’s former chief executive, Gregory Becker, exercised options in late February that permitted him to sell shares worth about $3 million for around $287 a share; the sales were disclosed in a regulatory filing on March 1. The filing also shows the stock trading plan was set up on Jan. 26, when shares of the bank closed at $296.
Some politicians have said the bank executives should return any money they made from those stock sales.
Becker could not be immediately reached for comment. The investigation was first reported by The Wall Street Journal.
It is not uncommon for investigators to look into prearranged stock selling plans when the sales take place shortly before bad news that
tanks a company’s stock.
The Securities and Exchange Commission also has opened an investigation led by the commission’s office in San Francisco, said a person briefed on the matter.
Andrew Calamari, a lawyer for Finn Dixon & Herling and a former director of the New York office of the SEC, said insider sales were an obvious issue for prosecutors to investigate.
He also said any SEC investigation would look at the insider sales, as well as the disclosures by the bank about its financial health.
The SEC did not respond to a request for comment. But Gary Gensler, the SEC chair, issued a statement Sunday in response to the trouble in the banking sector.
“Without speaking to any individual entity or person, we will investigate and bring enforcement actions if we find violations of the federal securities laws,” he said.
The collapse of Silicon Valley Bank was precipitated by a bank run by customers who had so-called uninsured deposits — accounts that exceeded the $250,000 limit on federally guaranteed deposit insurance — and tried to withdraw those funds.
The Federal Deposit Insurance Corp. seized the bank Friday and two days later seized another bank, Signature Bank of New York, which was facing a similar problem. The FDIC and the Federal Reserve also said all depositors of both banks would be made whole, avoiding concerns the business customers of the banks might not be able to pay their employees.
The bank failures raised widespread fear of depositors pulling their money out of regional lenders — a move that is expected to destabilize the banking system. But actions taken by federal regulators over the weekend appeared to stem some of that fear, pushing stocks of regional banks higher Tuesday.
CLASS ACTION
Atop federal scrutiny, shareholders are seeking a class action lawsuit against the parent company of Silicon Valley Bank, as well as its CEO and chief financial officer, saying the company failed to disclose risks associated with interest rate increases by the Fed.
The proposed class action against SVB Financial Group, CEO Greg Becker and CFO Daniel Beck was filed in the U.S. district court for the Northern district of California. It seeks compensation for unspecified damages to investors of SVB Financial Group between June 16, 2021, and March 10, when the bank failed and its assets were seized by regulators.
The lawsuit led by shareholder Chandra Vanipenta says some quarterly and annual financial reports from the company didn’t fully account for warnings from the Fed about its aggressive pace of interest rate increases over the past year.
In particular, the lawsuit says annual reports for 2020 through 2022, “understated the risks posed to the company by not disclosing that likely interest rate hikes, as outlined by the Fed, had the potential to cause irrevocable damage to the company,” the lawsuit stated.
The lawsuit also says the company “failed to disclose that, if its investments were negatively affected by rising interest rates, it was particularly susceptible to a bank run.”
The second-largest bank failure in the United States, Silicon Valley Bank’s collapse has shaken the tech industry and banking sector. The bank had established itself as the “go-to” spot for venture capitalists looking for financial partners that are more open to unconventional business proposals than bigger, more established banking peers.
Venture capitalists set up accounts at Silicon Valley Bank just as the tech industry started its boom, and then advised entrepreneurs they funded to follow suit.
That cozy relationship came to an end last week when the bank disclosed a $1.8 billion loss on low-yield bonds purchased before interest rates began to spike, raising alarms among its financially savvy customer base who then spread warnings that turned into a calamitous run on deposits.