Court Finds FDIC-R Entitled to Fully Offset SVB Financial Trust’s $1.71B Deposit Claim; Holds Holding Company Liable Under Aiding-and-Abetting, Agency Theories, Voids $294M Dividend

Relevant Documents:
Opinion
Judgment

On Aug. 28, U.S. District Judge Beth Labson Freeman entered an opinion and judgment against SVB Financial Trust on the trust’s breach of contract claim, ruling that the Federal Deposit Insurance Corp., as receiver for Silicon Valley Bank, or FDIC-R’s affirmative defenses “provide a complete setoff” of the SVB Financial Trust’s stipulated $1.71 billion deposit claim. The judge ruled in favor of the trust on the agency’s unclean hands defense but this ruling does not impact the result of the decision.

Unless reversed on appeal, the decision extinguishes the trust’s largest remaining source of recoveries from the SVB Financial Group, or SVBFG, chapter 11 estate. The Second Circuit heard argument in January on the trust’s appeal of Judge Martin Glenn’s August 2024 ruling preserving the FDIC’s set-off claims from discharge in the bankruptcy, with a decision pending. The FDIC-R argued in its trial brief that the unclean hands defense is an equitable defense, not a set-off, and would not be affected by the Second Circuit appeal of the bankruptcy decision that preserved the agency’s set-off defenses from discharge.

The litigation stems from the FDIC’s blocking of approximately $2 billion in holding company deposits at the bank when regulators closed SVB on March 10, 2023, “in what was the third-largest bank failure in U.S. history.” The trust was substituted into the action after the SVBFG debtor’s chapter 11 plan became effective in November 2024.

The scope of long-running litigation was substantially narrowed in May 2025 via stipulation when the parties fixed the FDIC’s liability on the trust’s breach of contract claim at $1.71 billion, subject to the FDIC-R’s set-off claims and other affirmative defenses. The trust dropped all of its other claims including a demand to recover the full amount of the deposit claim under the “systemic risk exception” invoked by the U.S. Department of the Treasury in conjunction with the FDIC and the executive branch after SVB’s failure in March 2023.

A three-week trial that formed the basis of Judge Freeman’s decision concluded on July 17. The FDIC-R had the burden of proof to establish affirmative defenses to set off the entirety of the trust’s stipulated damages. FDIC-R based these affirmative defenses on the contention that SVB’s former holding company SVB Financial Group, or SVBFG, aided and abetted breaches of fiduciary duty via mismanagement of its former banking subsidiary through “overlapping” directors and officers of SVB and the holding company. Post-trial briefs were filed late last month.

Judge Freeman credits the “unrebutted” testimony of FDIC damages expert Kenneth Malek that the bank suffered at least $4.52 billion in securities losses due to the directors’ and officers’ asserted mismanagement of the bank’s held-to-maturity, or HTM, and available-for-sale, or AFS, portfolios that would have been avoided in a “but-for-world” if the bank had complied with prudent risk limits. Malek’s analysis assumed the bank would not have purchased an incremental $32.7 billion in long-term, fixed-rate securities during the first three quarters of 2021 while in breach of its economic value of equity, or EVE, limits.

Judge Freeman also finds the agency established about $636 million in additional damages caused by retaining previously hedged AFS securities after the July 2022 interest-rate hedge terminations and that the $294 million bank-to-parent dividend was a voidable transfer because the bank was operating with unreasonably small assets at the time.

Judge Freeman rejects the trust’s argument that some losses were unrealized for accounting purposes, holding that courts “regularly award damages for unrealized losses” and that all the losses predated the bank’s failure. The judge dismisses the trust’s core causation defense that the bank run and large increases in interest rate risks were unforeseeable to an ordinarily prudent banker. Judge Freeman concludes that SVB would not have been able to “indefinitely hold underwater” HTM securities in a higher-rate environment and credited Malek’s testimony that SVB would have been forced to sell HTM securities “even absent a bank run.”

The judge also finds the FDIC-R obtained fair market value in the post-closure securities sales, noting the portfolio would have been subject to at least $2 billion per year in negative carry if left unsold.

Judge Freeman finds that SVBFG’s officers CFO Daniel Beck, Global Treasurer Michael Kruse and the other members of the officer-only asset liability committee, or ALCO, breached fiduciary duties of care and loyalty owed to the bank by concentrating the bank’s uninsured deposits in long-term, fixed-rate securities in the face of sustained breach of internal interest-rate-risk limits, terminating the bank’s interest-rate hedges while retaining the underlying securities, and approving the bank-to-parent dividend in December 2022 while the bank “was in dire financial condition.”

The 206-page opinion includes a narrative of the SVB’s rise and collapse. Judge Freeman reviews that, led by a “massive government infusion of cash into the economy” in the wake of the Covid-19 pandemic, the bank’s deposits grew from roughly $50 billion in 2018 to a high of almost $200 billion in 2021, with more than 90% of deposits uninsured.

According to the judge, the bank’s officers “virtually ignored the interest-rate risk” tied to SVB’s deployment of its excess deposits into investments in long-duration HTM securities into which those deposits were deployed. The judge says the officers failed to protect the securities portfolio against a foreseeable risk of interest rate increases from historical lows, and close to $100 billion of securities were “tied up” in HTM investments that yielded only a 1.5% return in a 4% interest rate environment.

Applying the standard of care of an “ordinarily prudent banker,” Judge Freeman finds the officers imprudently continued to purchase long-duration securities while operating in sustained breach of the enterprise-wide global treasury policy’s outer thresholds for EVE-at-risk, “with actual knowledge that the continued purchases would exacerbate rather than remediate the breach.” The judge adds that the officers never produced a risk-mitigation plan required under the treasury policy.

Instead, Judge Freeman says the officers “either ignored or were unaware of these risks and chose to chase short-term yields to boost the earnings of the Holding Company,” and designated the assets as HTM “to draw attention away from the unrealized losses” on the portfolio. The judge rejects the officers’ testimony that they acted on the advice of outside advisors BlackRock and Curinos in managing the securities portfolio. Judge Freeman says the officers repeatedly acted contrary to the outside advisors’ recommendations leading to an “inescapable inference” that the advisors were engaged as “end in itself” with the goal of lending “legitimacy to the challenged decisionmaking.”

The judge concludes that the officers breached their duty of loyalty and “sacrificed the interests of the Bank and its depositors” to boost the holding company’s short-term income and stock price. These benefits resulted in personal benefits to the officers through beneficial impacts to their compensation, the judge adds. Judge Freeman notes that Beck received his highest-ever incentive cash bonus of approximately $1.4 million in 2021 and was “encouraged” in his actions because his compensation was not docked for risk-management deficiencies.

Likewise, Judge Freeman finds the officers took excess interest rate risk by terminating interest-rate hedges on their AFS early. The judge says the officers’ actions threatened the long-term safety and soundness of the bank by eliminating “the little bit of protection they had” to secure short-term value without realizing losses on the underlying AFS securities. Finally, the judge concludes that the “only conceivable bases” for the officers to recommend the dividend was to “boost” the holding company’s position at the “expense” of the bank.

Judge Freeman rejects the trust’s effort to protect the officers under the business-judgment rule by pointing to director approval of the challenged decisions. The judge reiterates her prior summary judgment ruling, holding that California’s business-judgment rule does not protect the officers, and emphasizes that officers “do not receive derivative business-judgment protection simply by virtue of directors’ participation in the decisionmaking process.”

Further, the judge says that the officers made the material decisions underlying the agency’s affirmative defenses in executing the security investment and hedging decisions. The directors “did not” exercise their oversight over the officers and did not authorize them to deviate from the board-approved global treasury risk thresholds or requirement for a risk-mitigation plan.

The officers attempted to justify ignoring the sustained EVE-at-risk breaches by claiming they doubted the underlying model’s accuracy, an excuse Judge Freeman dismissed as “unfounded” and used merely as a pretext to disregard the foreseeable risk of rising interest rates.

The judge finds that the holding company is liable for the officers’ torts on two independent theories. The agency demonstrated that the holding company aided and abetted the breaches through SVBFG’s director-level finance, risk and compensation committees and the holding company’s agency relationship with the dual-role officers.

The judge says the finance, risk and compensation committees, Becker and Chief Risk Officer Laura Izurieta knew of the continuous EVE-at-risk breaches and failed to exercise their obligations under the holding company charters and policies to “effectively challenge” management. The judge adds that Izurieta “virtually abdicated” her role as leader of the company’s risk management, which served as the company’s “second line of defense,” and the compensation committee encouraged the excessive risk-taking by tying pay to the holding company’s performance and stock-price appreciation.

Judge Freeman rejects the trust’s agency-immunity-rule argument because the officers breached duties they independently owed to the bank, and holds that California law recognizes aiding and abetting negligence.

On the agency theory, Judge Freeman concludes the dual-role officers acted “with their Holding Company hats tightly secured” and says the trust cannot rely on the presumption that dual-role officers act on behalf of the subsidiary when managing subsidiary assets under the Supreme Court’s 1998 Bestfoods decision. Unlike in Bestfoods, where the subsidiary officers set their own policies without parent company input, the judge observes that SVB did not have ”policies, committees, ALCO meetings, treasury department, or officers of its own that were independent of the Holding Company.” The holding company “chose” to operate SVB through its own officers under enterprise-wide policies and “must live with the consequences,” the judge concluded.

Judge Freeman finds the December 2022 bank-to-parent dividend is an avoidable transfer because the bank was operating with unreasonably small assets. The judge agrees with Malek that the bank’s $303 million of equity, “less than one percent of the balance sheet,” was “dwarfed” by the bank’s risk exposure in the investment portfolio. The judge notes that SVB’s equity position had recovered somewhat at the time the dividend was paid after reaching a negative equity value of $790 million in September 2022.

Judge Freeman concludes that the dividend’s central purpose was to fund a holding company stock buyback after SVBFG shares had fallen about 69.5% from an all-time high of $755 in November 2021 to $230 in December 2022. The judge observes that Beck communicated that “even a token buyback could be seen as a signal to the markets.” However, Judge Freeman finds that directors were not grossly negligent in approving the dividend, noting the approval resumed a pre-Covid dividend policy and was carried out within the capital management policy’s limits.

The trust’s sole victory was knocking out the FDIC-R’s fourth affirmative defense of unclean hands, which required a higher standard of clear and convincing evidence. Although the agency proved deviations from the standard of care, Judge Freeman finds the agency did not establish a “willful act” that “violates conscience” or good faith above ordinary negligence standard that applies to the aiding and abetting claims. The FDIC-R also failed to establish the unclean hands doctrine’s “demanding” direct nexus requirement after electing not to argue that the misconduct caused the bank’s failure.