Memorandum and Resolution on Request for Authority to Sue Six Former Officers and Eleven Former Directors of Silicon Valley Bank
The 多宝游戏下载 Board of Directors is today considering a request for authority to sue six former officers and eleven former directors of Silicon Valley Bank (SVB or Bank). I support this request because it seeks to hold these former officers and directors accountable for their breaches of duty in mismanaging the Bank鈥檚 investment portfolios that exposed SVB to significant risks, caused SVB to incur billions of dollars in losses, and resulted in a loss to the Deposit Insurance Fund currently estimated at $23 billion.
Silicon Valley Bank was established in San Jose, California, on October 17, 1983. SVB was owned by a bank holding company known as SVB Financial Group (SVBFG) whose Board was identical to the Board of the Bank. SVB鈥檚 approximately $191.4 billion in deposit liabilities, as of December 31, 2022, were associated with its commercial and private banking clients, mostly linked to businesses financed through venture capital. The Bank did not maintain a large retail deposit business.
Total assets grew rapidly from under $60 billion at the end of 2019 to $209 billion by the end of 2022, more than tripling in size in three years. As of year-end 2022, SVB was reporting in its call reports that 94 percent of its deposits were uninsured. This influx of deposits was largely invested in long-duration securities.
On March 8, 2023, SVB announced that it had sold securities at a loss to meet deposit withdrawals that had been occurring since the second quarter of 2022 and planned to raise capital. The same afternoon, Silvergate Bank, La Jolla, California (Silvergate) announced its intent to self-liquidate after similarly selling securities at a loss to meet depositor withdrawals.
As mentioned, SVB had a high level of uninsured deposits, at 94 percent of domestic deposits at year-end 2022, and a concentrated customer base. It is now known that in a period of less than 24 hours, depositors withdrew or sought to withdraw nearly all of SVB鈥檚 deposits prior to its closure by the California Department of Financial Protection and Innovation (CADFPI) on March 10, 2023. This triggered a contagion effect among other banks that was contained by the exercise of extraordinary emergency authorities by the 多宝游戏下载, Federal Reserve Board, and Secretary of the Treasury in consultation with the President.
When an insured bank fails, the 多宝游戏下载 has authority to investigate and hold accountable directors, officers, and other professionals who caused losses to banks later placed into 多宝游戏下载 receivership. The 多宝游戏下载鈥檚 Professional Liability and Financial Crimes Section and the Division of Resolutions and Receiverships investigate potential professional liability claims arising from every bank failure and pursue claims that are both meritorious and expected to be cost-effective. This request for authority to sue is the culmination of that investigation for SVB.
In this matter, the former directors and officers mismanaged the Bank鈥檚 held-to-maturity (HTM) securities portfolio by purchasing long-dated securities in a rising interest rate environment, breaching key internal risk metrics, and allowing an over-concentration of such assets, which far exceeded the holdings of its peer banks. This investment strategy exposed SVB to significant interest rate risk as the value of these securities declined sharply as interest rates increased.
They also mismanaged the Bank鈥檚 available-for-sale (AFS) securities portfolio by removing interest rate hedges in the AFS portfolio at a time of increasing interest rates. If this portfolio had continued to have been hedged properly, the Bank would have been protected against losses from rising interest rates.
Finally, SVB鈥檚 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.
As a result of the mismanagement of the held-to-maturity securities portfolio, the termination of interest-rate hedges on the available for sale securities portfolio, and the issuance of the bank-to-parent dividend, SVB suffered billions of dollars in losses for which the 多宝游戏下载 as Receiver has both the authority and the responsibility to recover.
In conclusion, I am pleased to support this request for authority to sue arising out of the failure of Silicon Valley Bank. It is vital that Bank leadership be held accountable for their failures.
Finally, I would like to thank staff from the Professional Liability and Financial Crimes Section and the Division of Resolutions and Receiverships of the 多宝游戏下载 for their thoughtful and diligent work on this very important matter.