March 30, 2023

Brown, Colleagues Raise Flags Regarding Failed Bank Executives’ Stock Trades

“Days before the collapse of the 40 year old bank, the Chief Executive Officer of SVB Financial Group … sold nearly $3.6 million of SVB Group stock”

Today, U.S. Sen. Sherrod Brown (D-OH), Chairman of the U.S. Senate Committee on Banking, Housing, and Urban Affairs, led eleven of his colleagues on the Banking and Housing Committee in a letter to Securities and Exchange Commission Chair Gary Gensler highlighting concerns with large stock trades made by Silicon Valley Bank (SVB) executives in the days and months before SVB’s collapse. At the Banking and Housing Committee hearing on Tuesday about SVB’s failure, several members of the Committee expressed concern over the size and timing of the executives’ stock trades. 

“Our capital markets are based upon the ironclad trust that corporate insiders act in the best interest of their shareholders, and not in their own self-interest. Addressing breaches of that trust is of paramount importance,” the Senators wrote. “The magnitude and timing of stock sales at SVB raise serious questions, and we ask for your prompt examination of these sales.”

Sen. Brown was joined by Senators Jack Reed (D-RI), Bob Menendez (D-NJ), Jon Tester (D-MT), Mark Warner (D-VA), Elizabeth Warren (D-MA), Chris Van Hollen (D-MD), Catherine Cortez Masto (D-NV), Tina Smith (D-MN), Kyrsten Sinema (I-AZ), Raphael Warnock (D-GA), and John Fetterman (D-PA).

Last week, Brown and Ranking Member Scott called on the CEOs of SVB and Signature Bank to testify in front of the Committee.

A copy of the letter is available here and below: 

Dear Chair Gensler: 

We write regarding recent news reports of executives at Silicon Valley Bank (SVB) selling millions of dollars’ worth of company stock in the days and months leading up to SVB’s failure. Our capital markets are based upon the ironclad trust that corporate insiders act in the best interest of their shareholders, and not in their own self-interest. Addressing breaches of that trust is of paramount importance. The magnitude and timing of stock sales at SVB raise serious questions, and we ask for your prompt examination of these sales.

Earlier this month, SVB, the nation’s 16th largest bank, was closed by the California Department of Financial Protection and Innovation and the Federal Deposit Insurance Corporation (FDIC) was appointed as receiver of the bank. Days before the collapse of the 40 year old bank, the Chief Executive Officer of SVB Financial Group (SVB Group), the holding company of SVB, sold nearly $3.6 million of SVB Group stock. On that same day—February 27—the Chief Financial Officer of SVB Group sold 2,000 shares of company stock at $287.59 per share, netting over $500,000. Both executives indicated their sales were pursuant to Rule 10b5-1 trading plans; however, those are new plans, having been entered into only in late January 2023. 

On March 9, the day before the FDIC assumed receivership of the bank, SVB stock closed at $106.04. In addition to those recent sales, in the two years preceding the bank’s collapse, SVB Group’s CEO reportedly sold nearly $30 million in company stock, and since 2021, several of the bank’s top executives collectively sold tens of millions of dollars of company stock.

The timing of the executives’ stock sales in 2023, including the establishment of Rule 10b5-1 trading plans only one month prior to the stock sales that occurred the week before SVB’s demise, is particularly problematic in light of the Securities and Exchange Commission’s (SEC) December 2022 adoption of amendments to Rule 10b5-1. Those amendments are designed to boost investor protection and help shareholders understand when and how insiders are trading in company securities. Notably, the updates become effective on April 1, 2023, and require that executive and director trading plans build in a 90-day cooling-off period between a plan’s adoption and commencement of trading under the plan. 

By entering into their trading plans prior to the effective date of the Rule 10b5-1 amendments, the SVB Group CEO and CFO avoided that cooling-off period, which is intended “to provide a separation in time between the adoption of the plan and the commencement of trading under the plan so as to minimize the ability of an insider to benefit from any material nonpublic information.” In addition, like any other executive using a 10b5-1 plan, SVB’s executives are required to have entered into their trading plans in good faith and “not aware of any material nonpublic information about the security.”

SVB’s financial distress emerged in 2022, as its bond portfolio showed large unrealized losses and its deposit base began to decline. Its balance sheet and liquidity position worsened in early 2023, and SVB feared a credit rating downgrade. The bank began working to raise capital to avoid insolvency, but those measures failed on March 8, 2023. Those measures reportedly started taking shape ten days prior, indicating that SVB’s financial difficulties had been progressing for some time. The continuing problems at SVB call into question the timeline for the executives’ February stock sales and the January trading plans. 

The Senate Committee on Banking, Housing, and Urban Affairs began to consider the management failures at SVB and the need for regulatory and supervisory enhancements at a hearing held on March 28, 2023, titled “Recent Bank Failures and the Federal Regulatory Response”. At that hearing, several Senators expressed concern over the size and timing of the SVB Group executives’ stock sales. The questions posed by Committee Members underscore the need for clear guidelines for trading by corporate insiders and for a framework that prevents gaming and abuse.

We believe that given the circumstances of the SVB Group stock sales the SEC must thoroughly review the circumstances of all the recent transactions. In fact, the sharp decline in the stock prices of several financial institutions means broader analysis may be necessary. While we expect the SEC’s amendments to Rule 10b5-1 will increase transparency and reduce gaming of stock sales, the SEC must evaluate compliance and enforce violations when appropriate. Trust that our markets operate fairly and efficiently for investors is the bedrock foundation of our financial system. Betrayal of that trust must be addressed to the fullest extent possible. Should regulators require additional tools in order to promote transparency and protect shareholders, we stand ready to work with you on such measures.

Thank you for your prompt attention to this matter.

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