Three months before the sudden collapse of Silicon Valley Bank under the weight of bad risk management, executives made what in hindsight would appear to be a curious move.
The bank, at a time when it was in extreme financial distress, made a $300 million dividend payment to its parent company, SVB Financial Group.
This is just one of the allegations made by the Federal Deposit Insurance Corporation, which has sued 17 former leaders of Silicon Valley Bank, alleging gross negligence and breaches of fiduciary duties. The suit seeks to recover billions of dollars in damages from what became the third-largest bank failure in U.S. history.
Federal officials called the dividend payment a “grossly impudent” move that “deprived SVB of essential capital and liquidity, for the sole benefit of SVBFG and its shareholders.”
Among the executives named in the lawsuit, filed Thursday in federal district court in San Francisco, are former CEO Gregory Becker, former CFO Daniel Beck, and President Marc Cadieux.
The suit accuses the executives of “egregious mismanagement” of the bank’s risk in the pursuit of short-term gains. The feds say the bank repeatedly breached its own policies around interest-rate risk and modified one of its models for no reason other than to make it appear not to be in violation.
“This conduct was negligent, grossly negligent, and a breach of the fiduciary duties of care and loyalty owed by each Defendant to SVB,” the lawsuit alleges.
The FDIC is serving as the bank’s court-appointed receiver, charged with helping creditors recover funds.
SVB’s rapid growth was fueled by deposits that were heavily concentrated in the technology and life sciences sectors. Because the majority of deposits exceeded the $250,000 threshold for FDIC insurance, 94% were uninsured.
The bank’s strategy was based on investing heavily in long-term unhedged securities, despite the clear risk from interest-rate hikes.
These practices continued even after regulators repeatedly warned the bank about its risk-management practices.