Securities Regulation Daily Wrap Up, FRAUD AND MANIPULATION—N.D. Cal.: KPMG wrongfully delivers ‘clean‘ audit despite knowing SVB’s red flags, (Aug 6, 2026)

By Jay Fishman, J.D.

The court determined KPMG probably acted with scienter from fear SVB would hire a different auditing firm.

California’s Northern District Court permitted the plaintiffs to amend their consolidated amended complaint (CAC), denied the defendant KPMG accounting and auditing firm’s (KPMG) motion to dismiss the complaint, and granted and denied in part the parties’ requests that certain documents remain sealed or be unsealed. The case involved the plaintiffs alleging under federal Securities Act Sections 11, 12 and 15, and later under Exchange Act Sections 10(b)/Rule 10b-5 and 20(a) as well, that KPMG provided SVB Financial Group (SVB), a bank subsidiary, with a “clean” audit despite KPMG’s knowing SVB was in a ruinous financial state (In Re SVB Financial Group Securities Litigation, No. 5:23-cv-01097-NW (N.D. Cal. Aug. 5, 2026)).

Flurry of litigation leads to current case. Following the SVB parent bank’s failure and placement in receivership by the Federal Deposit Insurance Corporation in March 2023, the lead plaintiff brought a consolidated class action complaint against the defendants, including KPMG, for violations of Securities Act Section 11, which did not require proof of scienter. A large portion of SVB’s portfolio contained held-to-maturity (HTM) securities, which are debt securities intended to be held until their maturity date, such as corporate bonds. HTM securities are normally accounted for by the amortized cost method. The complaint primarily alleged that KPMG delivered a clean audit to the SVB subsidiary despite knowing that, among other similar examples:

• Federal Reserve and internal audit findings identified “fundamental shortcomings” in the Bank’s liquidity risk management framework, governance, and controls;

• Liquidity stress tests projecting substantial shortfalls under foreseeable stress scenarios, indicated that the Bank could not satisfy its liquidity needs without resorting to HTM sales;

• Persistent EVE-risk limit breaches reflected heightened exposure to interest-rate risk, as well as regulator criticisms of the Bank’s interest-rate risk models;

• Internal documents showed that SVB expanded its HTM portfolio to enhance returns but by doing so simultaneously accumulated interest-rate and liquidity risk; and

• The Bank’s repeatedly sold or reclassified its securities during FY-2022, including in direct response to projected deposit outflows.

On June 13, 2025, the Court denied KPMG’s motion to dismiss the complaint, finding that the CAC sufficiently alleged that KPMG made materially false statements in its audit reports, in violation of Section 11 of the Securities Act by falsely stating that SVB’s financial statements complied with GAAP, that SVB’s internal controls were effective, and that KPMG conducted its audits in accordance with PCAOB standards (In re SVB Financial Group Securities Litigation, No. 5:24-cv-02684 (N.D. Cal. Jun. 13, 2025)).

In the months that followed, the parties engaged in extensive discovery. By February 2026, after the plaintiffs received millions of pages of documents from SVB, their legal counsel notified KPMG they now had sufficient facts to allege an Exchange Act 10(b) and Rule 10b-5 claim against KPMG for its 2021 and 2022 audit reports. The plaintiffs moved for their second amended complaint (SAC) containing the Exchange Act claim to proceed while KPMG moved to dismiss the SAC. Additionally, the plaintiffs requested that certain redacted defendant documents be unsealed while KPMG requested that the documents remain sealed because they contain confidential, proprietary information.

Plaintiffs SAC contentions. Plaintiffs alleged that KPMG blindly accepted management’s assertions at face value, failed to perform any meaningful analysis of whether SVB actually possessed the ability to hold its HTM portfolio to maturity, failed to test controls directed at that critical accounting judgment, and disregarded the absence of controls governing HTM classifications altogether. And, furthermore, that KPMG possessed extensive evidence—that it deliberately disregarded—demonstrating that SVB lacked the positive intent and ability to hold its HTM portfolio to maturity, yet KPMG nevertheless failed to meaningfully investigate, analyze, or reconcile that evidence before issuing the clean audit. Lastly, the SAC alleged evidence of scienter and loss causation (both mentioned later).

KPMG contentions for SAC dismissal. KPMG contended: (1) the SAC was barred by the statute of limitations; (2) the plaintiffs “waived” or “abandoned” the claim; and (3) the claim failed as a matter of law.

Court denies motion to dismiss. The court debunked KPMG’s abovementioned three contentions for dismissing the SAC.

1. Claim not barred by statute of limitations. First, the court determined the claim was not time-barred because the law firm representing the plaintiffs smartly decided it could not bring the Exchange Act claim against KPMG until it had all the discovered documents; without those documents the law firm wisely determined it could not argue that scienter was present. But following the receipt of the discovered documents, the firm timely brought the “Exchange Act SAC.”

2. Plaintiffs did not waive or abandon the claim. Here, the court found that KPMG incorrectly assumed the plaintiffs waived their SAC Exchange Act claim under Section 10(b) because the plaintiffs law firm alleged it in an earlier complaint and then voluntarily dismissed it. That would have been the correct finding in that scenario, the court proclaimed, but here the law firm never represented the current plaintiffs when it dropped the Exchange Act claim. For these plaintiffs, the CAC never contained the Exchange Act claim and, therefore, they cannot be held accountable. In short, these plaintiffs had nothing to do with that decision involving other plaintiffs in a totally separate action, and they should not be prejudiced because of decisions made by counsel before these current plaintiffs engaged the firm.

3. Plaintiffs' claim does not fail as a matter of law. On the Section 10(b) and corresponding Rule 10b-5 claim, the court agreed with the plaintiffs that KPMG made material misrepresentations by delivering SVB a clean audit in light of the overwhelming evidence of SVB’s financial failures that KPMG should have known as a professional accounting and auditing firm.

Also, the court declared KPMG acted with scienter. The record showed a compelling motive to falsely produce a clean audit at least pertaining to KPMG’s FY-2022 audit. The SAC alleged that during the period KPMG was working on this audit, SVB notified KPMG that SVB intended to seek competitive bids for its audit work. “KPMG, caught completely off-guard, responded by actively courting the Bank’s business, including meeting with SVB executives and considering a multi-million-dollar sponsorship commitment associated with Defendant Becker” (who is again mentioned below on the sealing of documents issue). The court found “these facts demonstrate KPMG had the “motivation to overlook [accounting issues] in order to protect its own source of lucrative accounting and consulting fees,” a finding that can “strengthen an inference of scienter.” The court concluded that when viewed alongside KPMG’s repeated failure to investigate contradictory audit evidence, challenge management’s assumptions, or revisit its conclusions despite mounting warning signs, they further support the inference that KPMG had incentives to avoid dissatisfying SVB.

Lastly, there was loss causation. A previous court order concluded that SVB’s false and misleading HTM accounting was adequately alleged to be a substantial cause of the investors’ losses. And KPMG offered no substantive explanation for why that ruling would not extend to its audit opinions. “Nor could it,” the court determined, because “the SAC pleads that market participants themselves “trac[ed]” each corrective event “back to ‘the very facts about which [KPMG] lied’” “by expressing heightened concerns about SVB’s HTM accounting.”

The sealing or unsealing of documents. For the most part, the court granted the plaintiffs’ request to unseal KPMG’s documents. The court found KPMG was unable to show that the vast amount of the documents contained confidential, proprietary information. Pertaining to defendant Becker, however, the court decided not to unseal his documents. Given that his documents were sourced entirely from documents produced to him by the Federal Deposit Insurance Corporation in another litigation, different regulatory authorities were required to weigh in before Becker could produce the documents to another party. The court, therefore, decided to wait until after those regulatory authorities weighed in on Becker’s documents.

This case is No. 5:23-cv-01097-NW.

Judge: Wise, N.

Attorneys: Laurence Matthew Rosen (Rosen Law) for Chandra Vanipenta. Sharan Nirmul (Kessler Topaz Meltzer & Check, LLP) for Asbestos Workers Philadelphia Welfare and Pension Fund, City of Hialeah Employees Retirement System and Heat & Frost Insulators Local 12 Funds. Mary Elizabeth Graham (Grant & Eisenhofer P.A.) for International Union of Operating Engineers Local 132 Pension Fund. Adam Marc Apton (Levi & Korsinsky, LLP) for Aizaz Siddiqui. Pavithra Rajesh (Glancy Prongay Wolke & Rotter LLP) for Elliot Snook. Diane McGimsey (Sullivan & Cromwell LLP) for SVB Financial Group. Alexander Setzepfandt (Ehrlich & Craig LLP) for Greg W. Becker. Barry H. Berke (Gibson, Dunn & Crutcher LLP) for Daniel Beck. Adam S. Hakki (A&O Shearman) for Goldman Sachs & Co. LLC and BofA Securities, Inc.

Companies: Asbestos Workers Philadelphia Welfare and Pension Fund; City of Hialeah Employees Retirement System; Heat & Frost Insulators Local 12 Funds; International Union of Operating Engineers Local 132 Pension Fund; SVB Financial Group; Goldman Sachs & Co. LLC; BofA Securities, Inc.

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