US appeals court revives Signature Bank lawsuit despite FDIC objection

Former Signature Bank shareholders just got a second shot at holding the bank’s executives and its auditor accountable for what they allege were misleading statements about the bank’s health before it spectacularly imploded in March 2023.

The US Second Circuit Court of Appeals reversed a lower court’s dismissal of a securities fraud class action, ruling that the FDIC’s role as receiver for the defunct bank does not strip investors of their right to sue. The decision reopens a case that traces a stock price collapse from roughly $70 to $0.09, one of the more dramatic wipeouts in recent banking history.

What the court actually decided

The legal fight centers on a law called FIRREA, the Financial Institutions Reform, Recovery, and Enforcement Act. When a bank fails and the FDIC steps in as receiver, FIRREA includes a “succession clause” that transfers certain legal claims to the agency.

US District Judge Frederic Block had ruled that this clause gave the FDIC exclusive standing to bring the kind of claims shareholders wanted to pursue. In plain terms: if anyone was going to sue over Signature Bank’s collapse, it had to be the FDIC, not individual investors.

The Second Circuit disagreed. The appellate court found that shareholders’ securities fraud claims are distinct from the claims that transfer to the FDIC under FIRREA. Investors who bought stock based on allegedly false statements about the bank’s stability have their own injuries, separate from the bank’s corporate losses.

The lead plaintiff, AP7, a Swedish national pension fund, is now free to press forward with claims covering statements made between April 23, 2020, and March 2023. The defendants include former Signature Bank executives and KPMG, the bank’s external auditor.

The collapse and the crypto connection

The bank had built a significant business serving cryptocurrency clients, with more than 20% of its deposits coming from the crypto sector. When confidence in crypto-friendly banks evaporated in the wake of Silicon Valley Bank’s failure days earlier, Signature experienced a deposit outflow exceeding $10 billion in a single day. The New York State Department of Financial Services seized the bank the following day.

The class action alleges that Signature Bank’s leadership made inaccurate statements about the institution’s liquidity position and risk management practices. Specifically, the suit claims executives downplayed how exposed the bank was to concentration risk from its crypto depositor base and failed to adequately disclose vulnerabilities in its funding model, which relied heavily on uninsured deposits.

Why KPMG is in the crosshairs

The inclusion of KPMG as a defendant adds another layer to the case. External auditors serve as a check on the accuracy of a company’s financial disclosures. If a bank is misstating its risk exposure or liquidity position, the auditor’s sign-off on financial statements becomes part of the alleged fraud.

What this means going forward

The Second Circuit’s ruling carries implications beyond this single case. By establishing that FIRREA’s succession clause doesn’t automatically shut out shareholder securities fraud claims, the court has potentially opened the door for similar lawsuits related to other bank failures.

The timing matters too. The banking sector is still processing the aftershocks of the spring 2023 crisis that claimed Signature Bank, Silicon Valley Bank, and First Republic Bank in rapid succession.

AP7 and the class of affected shareholders now move into the discovery and litigation phase, where the actual strength of the evidence will be tested.

Disclosure: This article was edited by Editorial Team. For more information on how we create and review content, see our Editorial Policy.