The recent collapse of Silicon Valley Bank was the second-largest bank failure in U.S. history. Much has been written about what led up to the failure, but the TL;DR is:
- SVB invested in long-term Treasury bonds when interest rates were low
- When the Federal Reserve raised interest rates, the value of those bonds fell
- At the same time, SVB’s core customers — startups and venture-backed companies — were burning through cash and needed to withdraw theirs from SVB to stay in business
- To generate the cash it needed to meet its customers’ withdrawals, SVB sold its devalued T-bonds at a loss
- SVB’s stock tanked when it announced it will sell stock to raise money, which caused a social-media-powered bank run that ultimately led to the bank’s demise
SVB may become the first of multiple regional banks to fail due to the economic pressures caused by rising interest rates. A continuing banking crisis could spark significant litigation and government regulatory action for regional banks.
Given what might be looming over the horizon, legal leaders at regional banks should prepare for a potential increase in eDiscovery due to future legal proceedings regarding their or other banks’ financial woes.
What Fallout Can Regional Bank CLOs Expect After SVB’s Collapse?
Chief Legal Officers and general counsel of regional banks across the U.S. can’t afford to put off preparing for the potential legal implications of continued financial troubles. There are four critical issues their legal teams should focus on.
First, there’s the ever-increasing volume of eDiscovery.
Troubled regional banks facing regulatory actions or lawsuits filed by investors or depositors must contend with data volumes that increase daily and dwarf the volumes of just a few years ago. Every new tool added to a bank’s software stack is another data source legal teams must collect from in eDiscovery, not to mention the unofficial communication and collaboration tools employees might be using. Without the right technology, tackling the data from all of these sources can turn into an absolute nightmare for a bank’s in-house counsel.
Next, there could be delays in obtaining relevant information.
If a regional bank finds itself in a situation like SVB’s, employees and managers will have their plates full trying to save the institution or reassuring nervous depositors and investors. Legal teams’ requests for data to respond to subpoenas and litigation will probably get knocked down the priority list.
Then, there could be the never-ending series of subpoenas.
A financially distressed regional bank will face legal complications, including investigations or litigation brought by the government or investors and depositors. State and federal regulatory actions plus multiple lawsuits mean in-house legal teams would have to manage multiple subpoenas and discovery requests. Rushing their responses could lead to inadvertent disclosures of confidential or privileged materials or an indefensible production resulting in court sanctions.
This all adds up to increased eDiscovery costs.
Faced with more eDiscovery to process and review, less time to do so, and an increased volume of subpoenas and other discovery requests to respond to, legal teams who haven’t built efficient eDiscovery processes may need to rely on vendors and outside counsel who will charge a premium for having to do a lot in a short amount of time.
How Can Your Legal Team Prepare for Post-SVB eDiscovery?
Years ago, managing eDiscovery was about as easy as herding cats. Although banks and other corporations have vastly more data to contend with these days, some tools have kept pace to help legal teams handle modern eDiscovery challenges.
Today’s eDiscovery software makes it easy for legal teams to collect and organize data so that in-house or outside counsel can quickly review documents for relevance, privilege, and apply redactions — even when the volume of those documents grows with each litigation or investigation.
Some tools, like Logikcull, integrate with the applications that businesses use, avoiding the need to export data and hand it over to an eDiscovery vendor. And with advanced search and filtering capabilities, reviewing documents is as easy as shopping online for clothes.
Given the possibility of more legal action aimed at regional banks, their legal teams should streamline their eDiscovery process so they can quickly review and understand the information in the documents they’re turning over. Here are simple steps they can take:
- Automating legal holds
- Ensuring they have a process for pulling all relevant data from the locations where employees store data, such as Slack, Google Vault, and Microsoft Teams
- Using eDiscovery tools that automatically organize and deduplicate files and make them searchable
- Transcribing audio and video files so they can be reviewed quickly and redacted if needed
- Training employees on the bank’s eDiscovery tools so they are prepared to use them on short notice and when facing tight deadlines
It’s also important to remember that bank employees may use more than their employers’ “official” applications and software to conduct business. They might text colleagues or vendors on their personal cell phones, connect with current and prospective clients via DMs, and share work files through their personal Google Drive or Dropbox accounts. Banks’ legal hold notices should make clear to custodians that the holds include these unofficial data sources.
Conclusion
The collapse of SVB may bring about a period of financial stress for regional banks. Should any face a similar fate to SVB, or face allegations of wrongdoing, their regulators, depositors, and investors may turn to investigations or litigation to uncover evidence that proves those allegations are true.
If this were to happen, banks’ eDiscovery processes would take center stage.
eDiscovery solutions like Logikcull offer powerful end-to-end capabilities for legal teams to quickly gather, organize, review, and produce eDiscovery. They help legal professionals prepare for and adapt to the changing eDiscovery landscape.
Without modern eDiscovery tools, regional bank CLOs risk compounding their financial institutions’ problems during share price drops or bank runs by not having a clear sense of what legal liability they may have, or by improperly or inadequately responding to discovery or subpoena requests.
