|Sjunde AP-Fonden v. DePaolo, et al.
|United States District Court for the Eastern District of New York
|Honorable Frederic Block
|Joseph DePaolo; Eric Howell; Frank Santora; Joseph Seibert; Scott Shay; Vito Susca; Stephen Wyremski; KPMG LLP
|January 21, 2021 to March 12, 2023, inclusive
This securities fraud class action arises out of representations and omissions made by former executives of Signature Bank (“SBNY” or the “Bank”) and the Bank’s auditor, KPMG, about the Bank’s emergent risk profile and deficient management of those risks that ultimately caused the Bank to collapse in March 2023. The Bank’s collapse marked the third largest bank failure in U.S. history, and erased billions in shareholder value.
As is alleged in the Complaint, SBNY had long been a conservative New York City-centric operation serving real estate companies and law firms. Leading up to and during the Class Period, however, the individual Defendants pursued a rapid growth strategy focused on serving cryptocurrency clients. In 2021, the first year of the Class Period, SBNY’s total deposits increased $41 billion (a 67% increase); cryptocurrency deposits increased $20 billion (constituting over 25% of total deposits); and the stock price hit record highs. Defendants assured investors that the Bank’s growth was achieved in responsible fashion—telling them that the Bank had tools to ensure the stability of new deposits, was focused on mitigating risks relating to its growing concentration in digital asset deposits, and was performing required stress testing.
Unknown to investors throughout this time, however, Defendants lacked even the most basic methods to analyze the Bank’s rapidly shifting risk profile. Contrary to their representations, Defendants did not have adequate methods to analyze the stability of deposits and did not abide by risk or concentration limits. To the contrary, deposits had become highly concentrated in relatively few depositor accounts, including large cryptocurrency deposits—an issue that should have been flagged in the Bank’s financial statements. The Bank’s stress testing and plans to fund operations in case of contingency were also severely deficient. The Bank’s regulators communicated these issues directly to Defendants leading up to and throughout the Class Period—recognizing on multiple occasions that Defendants had failed to remedy them.
Investors began to learn the truth of Defendants’ misrepresentations and omissions of material fact as widespread turmoil hit the cryptocurrency market in 2022, resulting in deposit run-off and calling into question SBNY’s assessment and response to the cryptocurrency deposit risks. During this time period, Defendants again assured investors that the Bank had appropriate risk management strategies and even modeled for scenarios where cryptocurrency deposits were all withdrawn. Investors only learned the true state of SBNY’s business on March 12, 2023, when the Bank was shuttered and taken over by regulators.
In December, Plaintiff filed a 166-page complaint on behalf of a putative class of investors alleging that Defendants violated Section 10(b) of the Securities Exchange Act of 1934. The parties are currently engaged in motion to dismiss briefing.