Legal Alert

The Government Investigates Fallout From the “First Twitter-Fueled Bank Run”

by David L. Axelrod and Lauren Engelmyer
March 20, 2023


In the wake of the Silicon Valley Bank (SVB) collapse, questions loom about the role of social media in the bank’s demise. The federal government will devote significant resources to investigate what went wrong—including whether the run on the bank was a product of market manipulation and whether any bad actors illegally exploited the crisis to profit.

The Upshot

  • In the first three days of trading following the March 10 collapse of SVB, one of the primary lenders in the startup ecosystem, short sellers of regional bank stocks earned profits of more than $2.29 billion, according to one published study.
  • The SEC and DOJ will likely investigate whether any short-selling was illegal and whether there was an orchestrated scheme to drive stock prices artificially.
  • Social media hysteria around SVB in its waning days—what House Financial Services Chair Patrick McHenry described as “the first Twitter-fueled bank run”—will make these investigations unique.

The Bottom Line

It’s fair to assume that while SVB is the first Twitter-fueled bank run, it won’t be the last. What the agencies uncover and how they respond are likely to have major ramifications for regulation of public statements via social media about market activity.

On March 10, SVB, one of the primary lenders in the startup ecosystem, collapsed. As the global economy sifts through the rubble of the largest bank failure since the 2008 financial crisis, questions loom about social media’s role in the collapse. The federal government, specifically the Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve, will spend significant resources investigating what went wrong at SVB. Undoubtedly, as already reported, other government agencies, including the SEC and DOJ, will probe whether the run on the bank was a product of market manipulation and whether bad actors may have illegally exploited the crisis to make a profit.

The role of social media in the collapse and the aftermath demonstrate the power of social media and how bad actors can exploit it to manipulate events.

What Precipitated SVB’s Collapse

At its root, the bank’s failure was caused by a decline in startup funding, rising interest rates, and the firm’s sale of government bonds at a huge loss to raise capital. During the liquidity surge of 2020-21, SVB experienced a rise in deposits from venture capitalists and startups flush with cash. SVB decided to invest a large amount of these bank deposits in long-dated U.S. treasury bonds. But when the Federal Reserve hiked interest rates in 2022 to combat inflation, and signaled it would continue increasing rates, the value of SVB’s bond portfolio began to drop. At the same time, rising interest rates put pressure on the tech sector. Many bank customers withdrew money as venture capital started to dry up. Because SVB’s capital was committed to long-term investments, it lacked the cash on hand to meet customers’ liquidity demands. To raise capital, SVB decided to sell a $21 billion portfolio of treasury bonds in a 24-hour period, and took a nearly $2 billion loss on the sale. Within 48 hours of disclosing the sale of assets, a run on deposits caused the bank to collapse.

Why the SVB Collapse Has Triggered Government Investigations

Prosecutors and regulators commonly investigate stock sales when a financial institution experiences a large, unexpected loss. In this case, regulators will probe sales of SVB Financial stock days before the collapse, looking for potential insider trading and market manipulation. They will certainly investigate trading by SVB’s officers and executives, and what they knew or said about the bank’s business in the months leading up to SVB’s demise. It is the social media hysteria around SVB in its waning days that will make these investigations unique. As House Financial Services Chair Patrick McHenry described, SVB’s collapse was driven by “the first Twitter-fueled bank run.” This raises questions about whether bad actors may have used social media to manipulate the market and engage in other criminal misconduct that fueled stock price declines in SVB and other regional banks and startups.

The Social Media Hysteria   

In the days leading up to the bank’s collapse, some prominent venture capitalists used their large social media platforms to raise alarms. Evan Armstrong, lead writer of the business-focused newsletter Napkin Math, summed up in a tweet last week how the situation unfolded on Twitter:

“Kinda insane how this entire debacle was potentially caused by @ByrneHobart’s newsletter. Here’s how the butterfly effect happened. (1) Bryne posts this article/Tweet calling out SVB’s risk. (2) pretty much every VC I know reads this newsletter. (3) They all start to pay very, very close attention to SVB’s earnings. (4) Absolutely massive earnings miss by SVB. (5) Peter Thiel, USV, and Coatue are first to send out messages/mass emails to portfolio co’s to pull out funds. (6) Tech Twitter catches word of this. (7) Bank Run. (8) Collapse. (9) If FDIC/Buyer doesn’t come in, in the next 7 days, potential 20%+ collapse of entire startup industry.”

The social media hysteria did not stop with SVB’s collapse that Friday. In the following days, influential investors took to social media and stoked fears about what the collapse would mean for other banks and the tech sector. They warned that if SVB’s customers were not made whole, other bank runs would ensue. Just a few examples include:

  • The day after the SVB collapse, one prominent activist investor, with more than 650,000 followers on Twitter, tweeted that it was “unlikely any buyer will emerge to acquire the failed bank” and warned that “thousands of the fastest growing, most innovative venture-backed companies in the U.S. will begin to fail to make payroll next week.” He further posted, “Absent a system-wide @FDICgov deposit guarantee, more bank runs begin Monday am.”
  • Another influential account tweeted that Saturday, “Coming up next week” “depositors at small banks move to JP Morgan,” “more runs on banks” and “socialists cheer on demise of small banks.”
  • One prominent internet personality posted, “Run on the bank!”—a tweet viewed by 2.4 million people and retweeted more than 3,000 times.

Potential for Bad Actors to Exploit Social Media Hysteria  

There is no doubt that many on social media had good intentions in warning of the dire consequences that could follow from SVB’s collapse. But the escalating panic on Twitter and other social media networks will surely be a component of SEC and DOJ investigations into potential market manipulation and illegal trading. This situation created prime conditions for less well-intentioned entities to manipulate the market by fomenting a run on the banks and then taking advantage of the frenzy. These agencies will likely review whether those running prominent social media accounts engaged in contemporaneous trading to take advantage of the fear their tweets created. The SEC will have little difficulty identifying individuals that bet against regional banks and tying those traders to public statements that fed the frenzy. In the first three days of trading following SVB’s collapse, short sellers of regional bank stocks earned profits of more than $2.29 billion, according to data analytics company S3 Partners Research. The SEC and DOJ will likely investigate whether any of this short-selling was illegal and whether there was an orchestrated scheme to drive artificial stock prices.

Social media’s role in future investigations into SVB’s collapse is drawing comparisons to investigations into an alleged trading scheme surrounding GameStop Corp. in 2021. Like GameStop, the run on SVB represents another opportunity for people to use social media to engage in unlawful stock manipulation. It’s fair to assume that while SVB is the first Twitter-fueled bank run, it won’t be the last.

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