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.
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.
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.