FDIC Argues Silicon Valley Bank's Parent Company "Aided and Abetted and Conspired" in Breaches of Fiduciary Duties by SVB Directors
Notable claims, but not yet many details
The FDIC and the bankruptcy estate of SVB Financial Group, the former parent company of Silicon Valley Bank, are engaged in a legal dispute over approximately $1.93 billion that SVBFG had deposited at SVB when SVB failed.
The substance of SVBFG’s argument is that, pursuant to the systemic risk exception, “all depositors” of Silicon Valley Bank were to have been protected when the FDIC resolved the bank, even those with amounts deposited at SVB above the otherwise applicable deposit insurance limit. In SVBFG’s view, this means that its bankruptcy estate, like other depositors of Silicon Valley Bank, had a right to the money it had deposited with SVB before the bank failed. A Bloomberg article from last week has more background on the ongoing fight.
This evening the FDIC alerted the bankruptcy court overseeing SVBFG’s bankruptcy proceedings to a filing the FDIC made earlier today with a federal court in California that may be tasked with deciding the $1.93 billion deposit dispute.1 The FDIC’s filing argues that even if SVBFG is otherwise entitled to the $1.93 billion it had deposited with SVB - a claim the FDIC continues to dispute - the FDIC has “defensive set-off rights” that allow it to reduce that amount.
The FDIC says this filing is being made now because it feels it must address what it calls “SVBFG’s misstatements to the court” that the FDIC has been unable to identify a basis for a right to set-off. Thus, to “further correct the record,” the FDIC offers the court a “non-exhaustive list” of its defensive set-off rights and a summary of the bases for those rights.
Most notably, the FDIC asserts that “SVBFG aided and abetted and conspired in breaches of fiduciary duties by SVB’s directors and officers with respect to at least the following matters and in at least the following ways.”
Held-to-Maturity securities portfolio mismanagement, including, but not limited to, purchasing long-dated government securities in a rising interest rate environment and allowing risky over-concentrations in such investments to increase SVBFG’s stock price and management compensation to the detriment of SVB. Estimated damages are at least $5 billion.
Available-for-Sale (“AFS”) securities portfolio mismanagement, including, but not limited to, failing to properly hedge and improperly removing interest rate hedges to increase SVBFG’s stock price and management compensation to the detriment of SVB. Had the AFS securities portfolio been hedged properly, SVB would have been protected against losses from rising interest rates. Estimated damages are at least $725 million.
Payment of improper dividends by SVB to SVBFG at a time when SVB was experiencing financial distress and was in need of liquidity. Estimated damages are at least $294 million.
Sale of equity warrants by SVB to SVBFG at below fair market value prices. Estimated damages are at least $130 million.
The summaries quoted above are the only details provided in today’s filing, so the exact nature of the FDIC’s theories relating to the underlying breach of fiduciary duties by SVB’s directors and officers which SBVFG is alleged to have aided and abetted is not clear.2
Careful readers will have noted that the damages alleged by the FDIC add up to more than $1.93 billion. The FDIC says it is not seeking to affirmatively recover from SVBFG on any of these claims, but that instead it just wants to be allowed to use these claims to set off (which here would mean reduce to zero) any amounts that a court might determine are owed to SVBFG on its $1.93 billion deposit claim.
The hedging use of “may be tasked with” in the text is because for various procedural and other reasons the parties have also from time to time been disputing this $1.93 billion issue in a bankruptcy court in New York and a federal district court in New York. In December a district judge in New York told the bankruptcy court that the district court in New York would take things from here. Soon thereafter, though, this case commenced in California, and it is the California court in which today’s papers were originally filed where the action is moving most quickly at the moment.
The filing also argues that, in addition to giving rise to fiduciary duty claims, these same facts give rise to set-off rights under other theories such as unjust enrichment, breach of California law, and fraudulent transfer.