SEC and DoJ open probes into the collapse of SVB and stock sales by executives
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(Kitco News) - The U.S. Department of Justice (DoJ) and Securities and Exchange Commission (SEC) are taking a closer look at the collapse of Silicon Valley Bank (SVB) following the bank's historic run on deposits that resulted in regulators taking it over on Friday.
According to a report from the Wall Street Journal, people familiar with the matter said the separate probes by two of the top regulators in the U.S. are in their preliminary phases and are not guaranteed to result in charges or allegations of wrongdoing.
The investigations will include an examination of stock sales that SVB Financial’s officers made in the days leading up to the bank's failure, the sources said. Fraud prosecutors in Washington and San Francisco are leading the DoJ probe.
SVB’s collapse late last week threw the financial world into a tailspin as many investors had flashbacks to the great financial crisis of 2008 and responded by selling assets and pulling their money out of smaller banks in favor of larger institutions, like JPMorgan and Bank of America.
The fact that up to 50% of the start-ups in the U.S. banked with SVB only made matters worse, as many companies spent the weekend wondering how they would pay their employees and stay in business without being able to access the funds they held at SVB.
On Sunday, President Biden announced that all deposits at both SVB and Signature Bank would be fully backed by the Treasury Department, which helped calm fears and put an end to the sell-off across financial markets.
Actions by the Federal Reserve in regard to interest rates played a part in the demise of SVB as the rapid rise in rates seen over the past year negatively affected the value of the Treasury’s and other government-sponsored debt securities the bank held on its balance sheet.
In its latest annual report to investors, SVB Financial cautioned its investors that its business was heavily focused on lending to newer companies in the technology, life-science and healthcare industries. “Our loan concentrations are derived from our borrowers engaging in similar activities that could cause those borrowers to be similarly impacted by economic or other conditions,” it said.
Securities filings show that Greg Becker, SVB’s financial chief executive, and Daniel Beck, the company’s chief financial officer, both sold shares in the week prior to the bank collapse. Becker exercised options on 12,451 shares on Feb. 27 and sold them the same day, netting about $2.3 million, while Beck sold just over $575,000 worth of shares on Feb. 27, roughly one-third of his holdings in the company.
Records show that both sales were done under 10b5-1 plans, which allow insiders to schedule share sales in advance to reduce suspicion of trading on nonpublic information. Plans for the trades were filed 30 days prior to their execution. While the SEC recently tightened the rules for the plans to include a 90-day waiting period before sales can be executed, the new rules didn't into effect until Feb. 27, the same day the executives sold.
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The SEC’s enforcement probe will likely focus on examining whether SVB accurately disclosed all financial risks or business uncertainties prior to last week's events. This will include a review of the company’s regulated, periodic disclosures as well as management’s statements to investors or analysts on conference calls and in other forums.
SEC Chair Gary Gensler signaled that the investigation would be forthcoming in a statement he released on Sunday as the government was working to minimize the fallout from the collapse of SVB.
“In times of increased volatility and uncertainty, we at the SEC are particularly focused on monitoring for market stability and identifying and prosecuting any form of misconduct that might threaten investors, capital formation, or the markets more broadly,” Gensler said. “Without speaking to any individual entity or person, we will investigate and bring enforcement actions if we find violations of the federal securities laws.”