In re SVB Financial Group Securities Litigation

Background

This putative class action concerns securities issued by Silicon Valley Bank Financial Group, the parent company of Silicon Valley Bank. Lead Plaintiffs Norges Bank and Sjunde AP-Fonden alleged violations of Sections 11, 12(a)(2), and 15 of the Securities Act of 1933 and Sections 10(b), 20(a), and 20A of the Securities Exchange Act of 1934.

The Exchange Act claims were brought against former SVB Chief Executive Officer Gregory W. Becker and Chief Financial Officer Daniel J. Beck. The Securities Act claims were brought against former executives, directors, underwriters, and KPMG LLP, SVB’s outside auditor. Plaintiffs alleged that defendants made misleading statements or omissions concerning SVB’s risk controls, risk models, interest-rate risk, liquidity management, held-to-maturity securities, internal controls, and disclosures required by Regulation S-K.

The complaint alleged that SVB’s weaknesses became apparent as interest rates rose and depositors withdrew funds. SVB announced on March 8, 2023, that it had sold substantially all of its available-for-sale securities at a loss, needed to raise approximately $2.25 billion, and was lowering its net-interest-income guidance. Trading in SVB stock was suspended on March 10, 2023; the bank was closed and placed into receivership; and SVB later filed for bankruptcy protection.

Motions and Legal Standards

The Exchange Act Defendants, KPMG, and the Executive, Underwriter, and Director Defendants filed three motions to dismiss under Federal Rule of Civil Procedure 12(b)(6). At this stage, the court accepts well-pleaded factual allegations as true and asks whether the complaint states a legally plausible claim. The court does not resolve factual disputes or decide whether plaintiffs will ultimately prove their allegations.

The court explained that Exchange Act claims require allegations of a material misrepresentation or omission, the required state of mind, a connection to a securities transaction, reliance, economic loss, and loss causation. The Private Securities Litigation Reform Act requires particularized allegations of falsity and facts creating a strong inference that defendants acted intentionally or with deliberate recklessness.

Securities Act Sections 11 and 12(a)(2) claims require a material misrepresentation or omission but do not require proof of the defendants’ state of mind. Section 15 claims require an underlying Securities Act violation and allegations that the defendants controlled the primary violator. The court also applied the standards governing statements of opinion, including whether omitted facts made an opinion misleading to a reasonable investor.

Exchange Act Claims

The court rejected the Exchange Act Defendants’ arguments concerning 25 alleged misstatements. It held that the complaint adequately alleged falsity, including allegations that defendants described known or existing risks as merely possible, made statements about risk controls and liquidity that allegedly conflicted with information they possessed, and represented that SVB could hold certain securities to maturity despite allegedly lacking the ability to do so.

The court also declined to dismiss the challenged statements as nonactionable opinions or puffery. It found that some statements described objectively verifiable aspects of SVB’s risk controls and financial reporting. For other statements, the complaint adequately alleged that the opinions were misleading because they omitted facts concerning SVB’s liquidity-risk management and ability to assess risk. The court stated that materiality and the significance of the statements were fact-intensive issues not suitable for resolution on these motions.

The court further held that plaintiffs adequately alleged scienter—the required fraudulent or deliberately reckless state of mind—based on alleged regulatory feedback, communications with former employees and consultants, and alleged financial motivation. It also held that plaintiffs adequately alleged loss causation by alleging a significant stock-price decline and facts plausibly connecting that decline to the alleged fraud. Because the Section 10(b) claim survived, the related Sections 20(a) and 20A claims also survived.

Securities Act Claims Against the Securities Act Defendants

The court applied its analysis of overlapping statements under the Exchange Act to the corresponding Section 11 claims and denied dismissal on those grounds. It separately considered allegations concerning SVB’s classification of securities as held-to-maturity. Plaintiffs alleged that SVB represented it had the ability and intent to hold the securities to maturity even though defendants allegedly knew SVB lacked sufficient liquidity to do so. The court held that defendants’ factual challenges could not be resolved at the motion-to-dismiss stage.

The court also held that plaintiffs adequately alleged violations of Items 303 and 305 of Regulation S-K. Those provisions concern disclosure of known trends and uncertainties likely to materially affect financial condition and disclosure of market-risk exposures and how those exposures are managed. The court concluded that plaintiffs plausibly alleged SVB disclosed some risks while omitting other information that could have materially changed a reasonable investor’s understanding of the company’s condition.

Because the complaint adequately alleged a primary Section 11 violation and that the Securities Act Defendants were controlling persons of SVB, the court allowed the Section 15 claim to proceed as well.

KPMG

KPMG challenged statements in the offering documents concerning its audit opinions, SVB’s financial position, internal controls over financial reporting, compliance with generally accepted accounting principles, and compliance with standards of the Public Company Accounting Oversight Board.

The court treated the auditor statements as opinions governed by the standard announced in Omnicare. It rejected plaintiffs’ first two theories of falsity but held that plaintiffs adequately pleaded an omission theory. According to the complaint, KPMG had access to SVB’s internal and financial information, knew of deficiencies involving liquidity, interest-rate risk, and held-to-maturity securities, and nevertheless issued unqualified audit opinions. The court held that these alleged omissions called into question the basis for KPMG’s opinions and made the Section 11 claim sufficient to proceed.

Disposition

The court denied the Exchange Act Defendants’ motion to dismiss, denied KPMG’s motion to dismiss, and denied the motion to dismiss filed by the Executive, Underwriter, and Director Defendants. The order did not decide whether defendants are ultimately liable or whether plaintiffs will prevail. It required defendants to file an answer to the operative complaint within 21 days.