New Type of Backdating Risk at SVB Financial: To Clients

Nov.15.06 | About: SVB Financial (SIVB)

Credit to Stephen Taub of for turning up a fresh angle in the option backdating saga. It seems that SVB Financial, a holding company operating Silicon Valley Bank, filed its 10-Q last week and listed a new kind of risk factor in the document: its clients may face an uncertain future due to the ongoing investigations. In turn, that could lead to fairly negative implications for the bank itself, according to SVB. (They also made the same disclosure in their August 10-Q. Sometimes it takes a while to notice these things.)

The text of the entire risk factor statement:

Many technology companies have been subject to scrutiny concerning their historical stock option grant activities which could negatively impact our client borrower market.

In recent periods, there have been several reports in the media questioning public company stock option practices, as well as a number of formal and informal regulatory investigations and other actions in connection with the historical stock option grant activities of certain companies. Many of our client borrowers utilize stock options in their employee compensation programs and, as such, could be adversely affected by these developments. Any increase in litigation, investigations or other regulatory actions which adversely affect companies that grant employee stock options, or that adversely affect the technology sector more generally, could adversely affect our client borrowers and potential client borrowers, and therefore could result in a material adverse impact on our results of operations.

That’s the first account I know of that mentions an effect on someone other than the companies undergoing the investigation. Is it a valid concern - could it really “result in a material adverse impact on results of operations? Or is it more of the kitchen-sink type of disclosure that companies are fond of making? It’s not hard to believe that firms lard up these disclosures so that no matter what goes wrong, they can point out that “what happened wasn’t our fault, because you were warned.”

Let’s think that through a little bit more. The bank’s clients are under investigation for improperly issuing stock options, which are an equity instrument. Maybe they run short on cash because of the cost of investigations: forensic accounting teams, outside legal counsel, and Silicon Valley witch doctors. Their stock prices get whacked because of the investigations, and they face the loss of valuable management talent - unless they compensate them well, of course. If they issue many more options for compensation, they’re now going to have to record a charge thanks to Statement 123R.

So…if these companies need incremental financing, whether for operations, legal defense or just plain compensation, they just might be turning to … their friendly neighborhood Silicon Valley Bank branch. Sounds more like a positive than a negative for the bank. And it sounds like it came from the kitchen sink.