Bank Turmoil Brings Increased Risk of Litigation and Investigations

Hunton Andrews Kurth LLP continues to assist clients and monitor developments in the financial markets arising from the liquidity challenges and market volatility currently facing the banking industry. Late Tuesday brought the first inevitable wave of lawsuits and government investigations. There will be many more in the days ahead.  

Government Investigations

Press reports indicate that the Department of Justice, the SEC, and state regulators have already initiated probes of Silicon Valley Bank, including stock sales by officers of its holding company, SVB Financial Group. We believe these investigations will expand to numerous other institutions.   Government inquiries into large, high-profile corporate losses are common and can evolve into industrywide sweeps. Expect regulators to focus on the adequacy of risk disclosures to investors, management practices, and trading activity by directors, officers, and other insiders.

Securities Class Actions

The first wave of lawsuits have now been filed by investors pursuing claims directly under the federal securities laws. The significant drops in stock price provide an attractive target for plaintiffs and provide the basis for substantial demands for damages. Although corporations, directors, and officers can invoke powerful defenses through the Private Securities Litigation Reform Act of 1995, private lawsuits carry with them significant financial exposure if a class is certified.

Shareholder Derivative Suits

Shareholders often bring derivative suits following significant corporate losses. Derivative suits do not require allegations of a false or misleading statement as federal securities claims do but focus instead on alleged breaches of fiduciary duty by directors and officers. Claims and defenses vary based on state law, but typically claims focus on alleged failures of oversight, self-dealing, and executive compensation. The Delaware Court of Chancery’s recent expansion of oversight liability to officers will make these claims especially attractive for plaintiffs. 

Practice Pointers

Immediately preserve all relevant documents. It is critical to preserve documents to avoid accusations that relevant evidence was destroyed. Consequences can include monetary and other sanctions, including adverse inferences at trial. Counsel can and should advise when the duty to preserve documents has been triggered.

Notify insurance carriers. D&O policies typically require insureds to provide prompt notice of a claim. Notify your carriers immediately upon being served with a lawsuit, derivative demand, or government inquiry.

Prepare a cohesive litigation strategy. The three types of actions described above are often intertwined. Government investigations often prompt private shareholder lawsuits, and multiple “cookie cutter” shareholder lawsuits can arise from the same facts. It will be vital to adopt a comprehensive and proactive strategy to deal with litigation that can quickly proliferate. Many of these claims also require close coordination with the banks’ auditors.

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How We Can Help: Hunton Andrews Kurth LLP has assembled a cross-disciplinary team consisting of attorneys from our bank regulatory, finance, structured finance and securitization, capital markets, securities, private equity/VC, M&A, employers’ rights, bankruptcy, restructuring and creditors’ rights practices to assist clients with the unfolding situations involving Silicon Valley Bank, Signature Bank and any similarly situated banks.

Please contact any of the attorneys listed on this Client Alert, any other attorney you regularly work with at Hunton, or reach out via email to HuntonTroubledBankTaskForce@huntonak.com, to be connected with our team monitoring and helping clients respond to these issues and continuing developments.