SVB Financial Trust claim against FDIC over Silicon Valley Bank collapse is rejected

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SVB claim against FDIC rejected

Highlights

U.S. District Judge Beth Labson Freeman rules SVB Financial Trust cannot pursue its $1.71 billion claim against the FDIC over Silicon Valley Bank's collapse.
Judge Freeman attributes investment loss responsibility to SVB executives' and board's negligent risk decisions, rejecting arguments for business judgment protections.
The FDIC is separately suing 17 former SVB executives and directors for billions in alleged gross negligence, as broader litigation over the $209 billion bank's failure continues.

Court ruling assigns responsibility for risk decisions

As reported by Reuters, U.S. District Judge Beth Labson Freeman rules in a 206-page decision issued on Friday that SVB Financial Trust cannot pursue the $1.71 billion claim against the Federal Deposit Insurance Corp. The San Jose, California, judge says the trust that took over the former parent company’s claims is responsible for executives’ failed decisions to try to raise profit through heavy investments in long-term government bonds and mortgage-backed securities.

Freeman says the bank’s chief financial officer, treasurer and others act negligently by taking excessive interest rate and liquidity risks, with encouragement from the board of directors. She rejects the trust’s argument that the directors are shielded by business judgment protections and also rejects the claim that losses arise only because the FDIC sold the securities at a loss.

In the decision, Freeman writes that the holding company chose to run the bank through holding company officers under global, enterprise-wide policies, limits and metrics that it established, and therefore must live with the consequences of that choice. She issues the ruling after a 12-day non-jury trial.

Collapse remains central to wider banking litigation

Silicon Valley Bank collapses after rising interest rates cause at least $4.52 billion of losses in its investment portfolio, triggering a bank run that disrupts many technology startups holding deposits there. Most of the bank’s deposits are uninsured, and the failure comes before the collapses of Signature Bank and First Republic Bank in 2023.

Before it fails, Silicon Valley Bank holds about $209 billion of assets. Its holding company is later succeeded by SVB Financial Trust, whose lawyers do not immediately respond to requests for comment on Monday, while the FDIC and its lawyers also do not immediately respond.

The FDIC is separately suing 17 former executives and directors of the bank, including former Chief Executive Gregory Becker, seeking to recover billions of dollars for alleged gross negligence and breaches of fiduciary duty. The latest ruling narrows one avenue for the former parent company to recover losses while broader litigation over the bank’s failure continues.

In our earlier article on surging U.S. interest payments on federal debt, we explained how higher rates have pushed annual debt-servicing costs above defense spending and made interest expense a growing strain on the federal budget. We also noted that rising yields can ripple through markets by lifting borrowing costs and intensifying fiscal and investment pressure when rates stay elevated.

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