A federal court has ruled that the Federal Deposit Insurance Corp. does not have to return $1.71 billion to creditors of Silicon Valley Bank’s parent company.
Judge Beth Labson Freeman of the U.S. District Court in San Jose, California, found that the bank’s parent company, SVB Financial, pursued a negligent strategy for the bank. Creditors will not be able to reclaim the $1.71 billion in cash that SVB Financial had deposited in its subsidiary bank.
“The officers of the Holding Company negligently caused billions of dollars in losses by their imprudent investment strategy that favored yield over safety,” she said. “Their conduct fell below the standard of care for ordinarily prudent bankers.”
Background of the SVB Collapse
The collapse of Silicon Valley Bank was at the time the second largest bank failure in U.S. history. After regulators seized the bank in March 2023, the FDIC took control of the $1.7 billion deposit.
SVB Financial later filed for Chapter 11 protection. Hedge funds and other distressed investors had purchased the parent company’s debt at discounts, wagering that the $1.71 billion deposit and other assets could generate recoveries for creditors.
Arguments from Both Sides
The liquidation trust argued that the FDIC should return the $1.71 billion, pointing to the government’s emergency decision to protect all Silicon Valley Bank deposits after a roughly $42 billion run threatened the institution.
“FDIC’s claims stem from its disagreement with business decisions, but that does not amount to a breach of fiduciary duty. FDIC’s criticisms are based on hindsight,” SVB Financial Trust said in its June trial brief. “In light of the circumstances when the decisions were made, the 2021-2022 investments and sale of hedges were reasonable, adhered to Board-set policies, aligned with peer banks, and were endorsed by regulators.”
The FDIC argued that it was entitled to retain the funds to help cover losses from the bank’s failure. After a 12-day trial, Freeman sided with the regulator.
Court’s Findings
“The evidence presented at trial established that the risk of a bank run was not only foreseeable but in fact foreseen,” she said in her ruling. “The Officers and Directors were not only aware of the possibility of a sharp increase in rates, but actively worried about this possibility.”