Signature Bank Sued by Investors for Downplaying Crypto Risks

News | April 12, 2023 By:

On March 31, 2023, a class action lawsuit has been filed in the United States District Court for the Eastern District of New York against Signature Bank for lying about the risks associated with its exposure to the cryptocurrency space.

Headquartered in New York City, Signature Bank is a full-service commercial bank founded in 2001 by former executives and employees of the Republic National Bank of New York. After deciding to accept clients from the crypto sector in 2018, cryptocurrency became a focal point of the bank’s activity during its final years. In 2021, more than 16 percent of the bank’s deposits came from the sector, a figure that had risen to 30 percent by February of this year.

In November 2022, crypto exchange FTX collapsed resulting in a wide-ranging disruption of the crypto markets. The collapse prompted Signature Bank to begin working to reduce the bank’s relationship with the crypto sector. According to reports, Signature was aware of the FTX fraud since June 2020 and is being accused of intensifying this illicit activity by publicizing the exchange and not taking actions to “close, suspend or otherwise limit” any FTX accounts that breached terms of service.

On March 12, 2023, Signature Bank was closed by the New York State Department of Financial Services (NYDFS) in order to protect depositors and transferred its assets to the Federal Deposit Insurance Corporation (FDIC). According to the NYDFS, the bank’s closure was unrelated to its dealings with cryptocurrency companies.

The lawsuit alleged that Signature Bank downplayed its exposure to the crypto space.

The lawsuit reads:

“Notwithstanding the volatility of cryptocurrency, Signature Bank consistently assured investors of the soundness of its crypto-related deposits and downplayed any risks associated with its lopsided exposure to the cryptocurrency industry, claiming that the Bank was carefully managing its balance sheet and bolstering its compliance department. On an April 2021 conference call, Defendant DePaolo stated that the Bank’s deposits were “sticky”—that is, likely to be renewed or rolled over by the customer as part of the Bank’s funding, including under conditions of stress, and thus beneficial to Signature Bank’s balance sheet. Ultimately, by late 2022, digital-asset clients represented more than one fifth of Signature Bank’s deposit base.”

The lawsuit continues:

“Throughout the Class Period, Defendants made materially false and misleading statements regarding the Bank’s business, operations, and prospects. Specifically, Defendants made false and/or misleading statements and/or failed to disclose that: (i) Signature Bank had failed to acknowledge the inherent volatility of digital-asset (i.e., cryptocurrency) related deposits; (ii) accordingly, the Bank had overstated the stability and/or sustainability of its deposit base; (iii) the degree of Signature Bank’s concentration in the cryptocurrency industry significantly undermined the health of its balance sheet; (iv) as a result of the foregoing, Signature Bank was exceptionally vulnerable to a bank run and/or a liquidity crisis; (v) the foregoing placed Signature Bank at a heightened risk of failure and/or regulatory takeover; and (vi) as a result, Defendants’ public statements were materially false and/or misleading at all relevant times.”

The lawsuit is demanding a jury trial and is seeking damages for investors who purchased shares between April 2020 and March 2023.

A copy of the original filing can be found here.