RiskApril 11, 2023

Pension Funds Sue Silicon Valley Bank’s Officers, Auditor KPMG Following Failure

Complaint alleges the company's executives and its auditor ‘understated and concealed’ the risks posed by rising interest rates.

Reported by Michael Katz

Three pension funds have filed a class action lawsuit against officers and directors from Silicon Valley Bank’s parent company, SVB Financial Group, and its auditor, KPMG LLP, for allegedly misrepresenting the strength of the company’s balance sheet, liquidity and position in the market. SVB Financial Group and subsidiary SVB Securities were not named in the suit due to their ongoing bankruptcy proceedings.

The complaint was filed in U.S. District Court for the Northern District of California on behalf of the City of Hialeah Employees’ Retirement System, the Asbestos Workers Philadelphia Welfare and Pension Plan, and the Pension Fund of Heat & Frost Insulators Local 12, funds based in Florida, Pennsylvania and New York, respectively. The proposed class would include all who purchased SVB securities on or after January 22, 2021.

The named Silicon Valley Bank officers include Greg Becker, president and CEO; Daniel Beck, chief financial officer; and Karen Hon, chief accounting officer, as well as Roger Dunbar, chairman of the bank’s board of directors, and others at the company director level.

The suit also names underwriters Goldman Sachs & Co. LLC, BofA Securities Inc., Morgan Stanley & Co. LLC and Keefe, Bruyette & Woods Inc. for violations of the Securities Act, although it alleges no fraudulent activity against those defendants.

According to the complaint, executives at SVB Financial Group “understated and concealed the magnitude of the risks facing the company’s business model” that would result from the Federal Reserve raising interest rates. It alleges this undermined the value of the bank’s securities and created an environment in which the bank’s private equity and venture capital clients conducted less business, leading to lower deposit levels at the bank.

The lawsuit claims that the misleading information caused the pension funds to buy the company’s stock at artificially inflated prices. It cites reports in The New York Times and other publications that the company had “actual knowledge of the misleading nature of the statements they made, or acted in reckless disregard of the true information known to them at the time.”

The first time investors learned about the liquidity pressures facing the bank, according to the lawsuit, was in late July 2022, when SVB announced “disappointing” second quarter results and lowered its 2022 financial guidance. This led to a 17% drop in the stock’s price, according to the complaint. It also noted that when the company again reported disappointing quarterly results in October 2022, SVB’s stock dropped 24%.

Then, after the market closed on March 8, “investors were stunned” when the company announced it was looking to raise approximately $2.25 billion in capital to address its liquidity issues, according to the suit. “The company’s demise quickly followed these disclosures,” says the complaint, adding that, “in response to this news, the price of SVB common stock fell $161.79 per share, or more than 60%.”

The complaint also cites a March 19 New York Times article reporting that the Federal Reserve Bank of San Francisco had been aware of SVB Financial’s “risky practices” for more than a year and had “repeatedly warned the bank that it had problems.” The article said a 2021 review by the San Francisco Fed resulted in six citations, and a July 2022 full supervisory review found the bank’s governance and controls were deficient and had used bad models to determine how it would be affected by rising rates.

According to the article, the San Francisco Fed had met with senior leaders at the bank to discuss its “ability to gain access to enough cash in a crisis and possible exposure to losses as interest rates rose.”

The complaint also accuses KPMG of failing to “identify risks associated with SVB’s declining deposits or SVB’s ability to hold debt securities to maturity.” Further, it alleges that KPMG’s audit report “was silent” as to whether there was substantial doubt about SVB’s ability to continue as a going concern for a reasonable period of time.

The suit alleges the underwriting companies—Goldman Sachs, BofA Securities, Morgan Stanley and Keefe, Bruyette & Woods—violated the Securities Act “based solely on claims of strict liability and/or negligence,” specifying they did not “[act] with scienter or fraudulent intent.”

KPMG declined to comment, while representatives for SVB Financial Group did not respond to a request for comment.