BROOKLYN (CN) — Investors who put their money in a New York bank that was seized by the state Sunday and quickly entrusted to the federal government took the bank's leaders to court Tuesday, accusing them of overstating their ability to weather the gathering financial storm.
The March 12 shutdown of Signature Bank came two days after the Federal Deposit Insurance Corporation seized the California-based Silicon Valley Bank after it faced a run on deposits last week amid news that it would have to sell a large amount of investments at a loss to shore up its balance sheet.
As those clouds were gathering over Silicon Valley Bank in early march, shareholders at Signature Bank say they were being misled by the institution and its top bosses with statements touting a “proven, stable commercial banking business model” with more than $100 billion in assets.
“As shown by our current metrics, we intentionally maintain a high level of capital, strong liquidity profile and solid earnings, which continues to differentiate us from competitors, especially during challenging times,” Eric Howell, the company’s president and chief operating officer, said in a March 9 update on the bank’s mid-quarter financial status.
With $212 billion in assets reported in the fourth quarter of 2022, Silicon Valley Bank's failure made it the second-largest one in U.S. history. The rank for first is still held by Washington Mutual, which crashed with $300 billion at the height of the 2008 financial crisis.
Signature Bank became the third-largest bank failure, according to the complaint, because its leaders could not make good on a promise to avoid that fate.
“The March 9 update overstated the company’s market position, given that just a few days later, it was shut down by the New York Department of Financial Services,” the lawsuit states.
New York banking laws allow regulators to take over banks that meet a set of conditions, including the inability to safely continue doing business, being in an “unsound or unsafe condition,” and having insufficient assets to pay its debts or amounts due to shareholders.
Given those laws, the bank’s reports didn’t give investors full view of the risks it was facing, or hint that it might be on the road to seizure.
As the receiver for Signature and Silicon Valley Banks, the FDIC promised to back all deposits in both banks, in an exception to its usual $250,000 insurance cap. President Biden spoke Monday to encourage trust in the country's financial system and said that management from both institutions will be fired.
“Americans can have confidence that the banking system is safe," Biden said. “Small businesses across the country that had deposit accounts at these banks can breathe easier knowing they’ll be able to pay their workers and pay their bills."
Money to repay deposits will come from the FDIC’s Deposit Insurance Fund of more than $100 billion, paid into by banks, and not taxpayers, Biden said.
Phillip Kim of The Rosen Law Firm PA represents the Signature Bank shareholders. In addition to the bank and Howell, the lawsuit names Chief Executive Officer Joseph DePaolo and Stephen Syremski, chief financial officer and senior vice president.
Signature Bank declined to comment on the lawsuit.
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