Insiders at collapsed Signature Bank sold more than $100 million of shares in the years after the bank pivoted to attract cryptocurrency companies and became a stock-market darling, according to a Wall Street Journal analysis.
Sales over the past three years by the bank’s chairman, its former chief executive officer and his successor accounted for about half of the amount sold, according to the Journal’s analysis of company filings. All three served on the board committee tasked with overseeing the bank’s risk profile over the past year.
The insider transactions at Signature weren’t widely known because of where they were filed and how the transactions were described in the documents.
New York regulators put Signature into receivership on March 12 after having "a crisis of confidence in the management team" during a run on its deposits triggered by the collapses of Silicon Valley Bank-parent SVB Financial Group and Silvergate Bank days earlier. SVB and Signature were respectively the second- and third-largest bank failures in U.S. history after Washington Mutual.
JAMIE DIMON WARNS BANKING CRISIS IS NOT OVER AND REPERCUSSIONS WILL LAST 'FOR YEARS TO COME'
Signature Bank didn’t reply to a request for comment. New York Community Bancorp’s Flagstar Bank, which will assume all of Signature Bank’s cash deposits, didn’t comment.
It was a steep and sudden fall for Signature, a nearly 22-year-old bank that was one of a small number of lenders to embrace the cryptocurrency industry. Cash from the sector helped drive up deposits by 68% in 2021 and launch the bank’s shares to a 140% gain that year. Insiders reaped $70 million from stock sales that year, selling twice as many shares as they did in 2020.
The executives sold many of their 2021 shares in the spring at around $220. The stock continued to rise throughout the year, hitting an all-time high of $366 in early 2022.
In a hearing last week, members of the Senate Banking Committee were critical of the bank’s executives, saying they sat by while risks at their banks grew unchecked.
Karen Petrou, managing partner at bank-consulting firm Federal Financial Analytics, said in an interview that someone at the bank should have called for a pause and asked, "‘Do we have the right kind of brakes for this speed? Can we steer the car?"
At Signature, the executives responsible for overseeing the bank’s risk were also champions of its courting of the crypto industry. That strategy focused on an internal payments platform called Signet that was used by crypto companies to manage their cash. Signature didn’t hold or lend cryptocurrency itself.
Chairman Scott Shay called himself a "crypto enthusiast" at a conference in 2022. It was Mr. Shay who had sketched out the initial idea for Signet by hand on a piece of paper that he kept framed in his office.
DOGECOIN SOARS AFTER ELON MUSK’S TWITTER BIRD SWITCH
Mr. Shay also chaired the risk committee of the bank’s board of directors. He sold $5.4 million of stock in 2021, according to the bank’s disclosures. He sold almost none in 2020 or 2022. He also bought $1.5 million of shares over those three years, and around $644,000 in 2023, before the bank’s collapse, the disclosures show.
Joining Mr. Shay on the bank’s risk committee were Joseph DePaolo, the bank’s chief executive, and Eric Howell, its chief operating officer, who joined the board and risk committee last April. Mr. DePaolo sold $13.9 million of shares in 2021, the disclosures show. Mr. Howell sold $14.9 million that year, according to the disclosures. Messrs. DePaolo and Howell sold another $9.2 million shares between them in March of 2022, the disclosures show.
From 2004 to 2019, Mr. DePaolo sold shares most years around the same time, netting about $39 million. Mr. Howell sold about $23 million of stock over the same period.
All three men advocated for doing business with cryptocurrency companies and investors, according to speeches and other statements they made. At a conference in 2021, Mr. DePaolo talked of the bank potentially lending against crypto assets, an idea that was later scrapped.
The three had been at the bank since it launched in 2001 and suffered big losses on their stockholdings when the bank collapsed. On the last business day before it was closed, Mr. Shay’s equity stake was worth $35 million, Mr. DePaolo’s about $15 million and Mr. Howell’s about $3 million, according to company filings and the closing share prices the last day before the bank was seized.
Mr. Howell, Mr. Shay and Mr. DePaolo declined to comment.
IS MY BANK SAFE FROM FAILING? WARNING SIGNS OF FINANCIAL TROUBLE
The extent of the executives’ sales was hard to determine in part because Signature filed the documents with the Federal Deposit Insurance Corporation, rather than the Securities and Exchange Commission, which is typical for companies of its size.
Most banks of this size have their securities regulated by the SEC and file their forms there.
Signature was one of only two companies in the S&P 500 that didn’t file insider-trading transactions to the SEC. The other was First Republic Bank, which was rescued by a $30 billion deposit by a group of large banks.
Filings with the FDIC typically escape notice from investors and services that track insider trades, according to professors who studied the disclosures. The FDIC website hosting the filings only allows filings to be viewed one at a time.
The bank also appeared to miscategorize some of its FDIC filings as dispositions to the company, meaning the shares were sold to the company, rather than sales on the open market. It isn’t clear why the sales were described this way, but the result was that they weren’t picked up by websites that track insider selling for investors. Investors closely monitor these sites for insights into executives’ views on their companies’ prospects.
Alan L. Dye, an attorney at Hogan Lovells and co-author of a book on disclosure rules for corporate insiders, reviewed a representative sample of Signature’s filings. He said he believed the reports don’t follow the instructions on the forms or the SEC staff’s position on how they should be filled out.
SILICON VALLEY BANK: WHAT WE LEARNED, WHAT’S NEXT AFTER THE COLLAPSE
"At a minimum, the information they report, including the footnotes, make it difficult to determine the nature of the transactions," he said.
Signature’s crypto bet soured in 2022 as some cryptocurrencies imploded and the price of bitcoin crashed. The company’s shares were dragged down with it, falling 64% on the year, while the bank’s deposits shrank by 17%. Signature’s price drop far outpaced the 15% decline in the SPDR S&P Regional Banking ETF over the same period. Signature Bank’s risk committee met four times in 2022, according to a company filing to the FDIC.
In December, Signature announced that it planned to significantly lower its exposure to the crypto industry. The bank had already lost billions of dollars of crypto-related deposits, the bank’s executives had said. In February, the bank announced that Mr. DePaolo would be stepping down as the bank’s president and chief executive officer. Mr. Howell was named as his successor.
Signature didn’t have the balance sheet losses that other struggling banks faced, but about 90% of its deposits weren’t insured by the FDIC, meaning customers had an incentive to flee. The crypto meltdown that began late last year dinged confidence in the lender. The demise of Silvergate Capital Corp., another bank that had bet on crypto, and the seizure of Silicon Valley Bank came before the collapse of Signature.
FDIC GIVES SIGNATURE’S CRYPTO CLIENTS ACCOUNT DEADLINE
Signature’s executives continued to back the bank. Silvergate collapsed on March 8. That day and the next, Mr. Howell bought about $960,000 of Signature’s preferred equity.
On Friday March 10, regulators said they were closing SVB. Signature’s customers withdrew $18 billion from the bank—about 20% of the lender’s total deposits. The same day, Mr. Shay bought about $414,000 of shares, according to a filing.
Over the following weekend, withdrawal requests continued to pile up while the bank looked for a buyer or capital infusion. In the early evening of Sunday, March 12, the New York regulators said they were closing the bank and had removed its senior leadership. Equity holders, like the executives, were wiped out.
At the Senate hearing, Martin Gruenberg, chairman of the FDIC board of directors, told the committee that the agency was performing a required investigation into the banks’ directors and officers for their management and conduct that could result in civil monetary penalties, restitution or professional bans. The bank’s executives declined to comment.
