In a landmark legal move, the Federal Deposit Insurance Corporation (FDIC) has filed a lawsuit against 17 former executives and board members of Silicon Valley Bank (SVB).

The suit alleges gross negligence and breach of fiduciary duty that led to the bank's historic collapse in March 2023.

The complaint was filed on Thursday (January 16) in a California federal court and seeks billions of dollars in damages. It names high-profile defendants, including former CEO Gregory Becker, former CFO Daniel Beck, and former Chief Risk Officer Laura Izurieta.

The FDIC asserts that mismanagement and reckless decision-making over two years preceding the collapse plunged the California-based lender into financial turmoil, culminating in its demise and a $23 billion loss to the Deposit Insurance Fund.

“SVB represents a case of egregious mismanagement of interest-rate and liquidity risks by the Bank’s former officers and directors,” the FDIC stated in its complaint.

The agency accused the bank’s leadership of prioritizing short-term profits for its parent company, SVB Financial Group (SVBFG), over sound risk management practices.

Multi-Million Dollar Dividend Approved Months Before Collapse

One critical point in the FDIC's lawsuit centers on a $294 million dividend payment approved in December 2022 by five officers and 10 directors, with the bank already on the brink of collapse.

According to the complaint, the payment drained SVB of essential capital and liquidity and was made solely to benefit SVBFG and its shareholders, despite the bank's precarious financial state.

This decision, the FDIC claims, exemplifies the leadership’s disregard for prudent banking practices and internal risk policies.

Warnings Ignored

The lawsuit further highlights SVB’s mismanagement of its securities portfolio in 2021, accusing the leadership of pursuing higher yields through heavy investment in long-term, unhedged securities while ignoring clear interest rate risks.

It alleges that the bank's officers manipulated internal risk models to conceal policy violations instead of addressing the underlying issues.

Despite mounting red flags, including rising interest rates, the FDIC claims the leadership failed to act, leaving SVB vulnerable to financial shocks.

Izurieta Lawyers Label Lawsuit Outrageous

The lawsuit names 11 board members and six executives, with particular scrutiny on Becker, Beck, and Izurieta. Lawyers for Izurieta, who left the bank in April 2022, pushed back against the allegations, calling it ‘outrageous’ to include her as a defendant.

“She provided sound risk management advice during her tenure,” her lawyers told Reuters. “This action reflects outgoing FDIC leadership that is not interested in the truth.”

Lawyers for the other defendants, including Becker, have not yet provided comments.

The Journey to Disaster

SVB, once a thriving institution catering to the tech and venture capital industries, saw its total assets more than triple in three years, growing from $60 billion in 2019 to $209 billion by the end of 2022.

However, the bank's strategy left it dangerously exposed. 94% of its deposits were uninsured, and much of its capital was locked in long-duration securities.

When economic conditions shifted and interest rates rose, SVB faced a liquidity crisis, ultimately leading to its downfall. The collapse was the third-largest bank failure in U.S. history and underscored systemic vulnerabilities in risk management across the financial sector.

Accountability Central to Lawsuit

FDIC Chair Martin Gruenberg has previously emphasized the importance of accountability in SVB's failure. In a December memo, Gruenberg highlighted the former leadership's role in exposing the bank to significant risks, which ultimately led to billions of dollars in losses.

The FDIC lawsuit aims to recover damages to offset the impact on the Deposit Insurance Fund and send a message to the broader financial community.

SVB's dramatic rise and fall serve as a stark reminder of the perils of ignoring basic risk management principles in pursuit of growth.

As the FDIC seeks to hold the bank’s former leadership accountable, the case may set a precedent for how regulators address corporate negligence in the financial sector.

For now, the lawsuit represents a critical step in unraveling the events that led to SVB's collapse and ensuring such failures are not repeated.