Feds Investigate Silicon Valley Bank Collapse, Insider Stock Sales

Justice Department, SEC looking into Bank's swift collapse, timing of executives' share sales

Members of the media interview a Silicon Valley Bank customer outside of the bank office on March 13, 2023 in Santa Clara, California. Days after Silicon Valley Bank collapsed, customers are lining up to try and retrieve their funds from the failed bank. The Silicon Valley Bank failure is the second largest in U.S. history.

Justin Sullivan / Getty Images

Federal authorities opened an investigation into stock sales by Silicon Valley Bank management in the weeks before its collapse, part of a broader probe into the events that led to its failure.

A trust owned by CEO Greg Becker sold SVB shares worth more than $3.5 million less than two weeks before the bank’s collapse, according to the Wall Street Journal. The sales were scheduled on Jan. 26 and executed on Feb. 27, using an SEC rule that lets management pre-set trades so they don't prompt accusations of insider trading. Still, the timing may prompt concern from regulators: The bank disclosed the losses that led to its failure just 10 days after the trades.

The U.S. Justice Department opened an investigation into the bank, which was taken over by federal regulators on Friday, after a run on deposits by customers, the New York Times reported, citing two people familiar with the matter. It joins the Securities and Exchange Commission (SEC) and the Federal Reserve in looking into the bank’s failure.

Key Takeaways

  • SEC, Department of Justice are investigating the financial undoing of Silicon Valley Bank and the role played by various individuals.
  • After disclosing a $2 billion loss in its bond portfolio, Silicon Valley Bank stock rapidly dropped as the company searched for a buyer.
  • The Federal Deposit Insurance Corporation (FDIC) quickly stepped in and halted activities at the bank.
  • If executives sold stock in the weeks leading up to the company’s crash with knowledge of financial troubles, they might have violated federal laws

Calls for Clawbacks

Becker and Chief Financial Officer Daniel Beck, who also sold shares before the failure, didn’t respond to requests for comment from the Wall Street Journal, nor did he respond to our requests for comment.

The lender's collapse cost its shareholders at least $60 billion and spread panic through financial markets, hitting bank stocks and cryptocurrencies and eliminating a lynchpin in venture capital, tech and life sciences funding. Bank regulators, who took over SVB after it disclosed a $2 billion loss on an asset sale that sparking a run as customers tried to withdraw their funds, scrambled to contain the fallout, offering emergency funding to banks and closing New York-based Signature Bank.

Senator Elizabeth Warren and other politicians called for the government to claw back profits from executives' stock sales and bonuses. SEC Chairman Gary Gensler said on Sunday, “Without speaking to any individual entity or person, we will investigate and bring enforcement actions if we find violations of the federal securities laws.”

SVB was the highest-paying publicly traded bank in 2018, according to Bloomberg, with employees getting average annual salaries of $250,683.

The SEC enacted updated insider trading rules earlier this year, clarifying certain requirements and timelines for allowed insider trading.

What Constitutes Insider Trading?

Enforced by the SEC, the law is periodically updated to protect investors from scenarios where insiders may have the advantage of “material nonpublic information.”

The SEC defines material inside information to include a material change in anticipated earnings, proposed offerings of securities, and other newsworthy scenarios that may shift share values in one direction or another. Investigators will want to know if Becker or other executives had access to information about SBV’s financial situation and plans to issue new stock when they planned their share sales.

Determining the timing of that knowledge and how it aligns with the stock sale orders is paramount to showing whether Becker traded while having material nonpublic information.

SEC regulations allow insiders to buy and sell stock as long as they pre-clear trades and only buy and sell during scheduled trading windows. The SEC also implies that a perception of insider trading may be enough justification to bring a case to court. Both the company and the executive are liable for the crime.

As the SEC says, “If you are perceived to be trading on nonpublic information, you may have to defend yourself in court even if you are innocent of any wrongdoing,"

Read More: Four Insider Trading Scandals

Article Sources
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  1. https://www.nytimes.com/2023/03/14/business/silicon-valley-bank-investigation.html?partner=slack&smid=sl-share

  2. https://www.wsj.com/articles/justice-department-sec-investigating-silicon-valley-banks-collapse-c192c2b2

  3. https://www.yahoo.com/lifestyle/svb-sinks-wiping-61b-market-220146456.html

  4. https://www.sec.gov/Archives/edgar/data/1164964/000101968715004168/globalfuture_8k-ex9904.htm

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