Morgan Stanley, Goldman Get Receptive Judges in Archegos Appeal

Morgan Stanley and Goldman Sachs Group Inc. appear close to free of allegations they sold shares on insider information during Archegos Capital Management LLC‘s $36 billion collapse in March 2021.

US Court of Appeals for the Second Circuit judges noted during oral arguments on Wednesday that the system by which Bill Hwang’s private investment firm quietly amassed large positions in several companies was uncomfortable and perhaps troubling to the average investor. But considering the Securities and Exchange Commission’s allowance of total return swap arrangements, judges questioned how that would weigh on their decision on liability for the two banks that acted as Archegos’ prime brokers.

Attorney David W. Hall of San Francisco, on behalf of investors, said Morgan Stanley and Goldman unlike other banks front ran the implosion of a market manipulation scheme they enabled by offloading “billions of their own proprietary shares and tipping their own third-party, hedge fund preferred clients to do the same.” Just because banks were considered victims in a criminal action against Archegos doesn’t mean that they didn’t participate in fraud, he said.

But the banks were deceived by Archegos and didn’t know until the scheme’s end about its massive positions, said Charles S. Duggan of Davis Polk & Wardwell LLP on behalf of the defendants. The banks had a contractual right to the provided information about Archegos’ exposures and ability to pay debts, he said.

No court has said total return swap arrangements sufficiently confer insider status to Archegos under securities laws, he said—Archegos didn’t own the shares or have capacity to vote on them, rather had exposure to price movements in the stock the banks owned. Archegos only knew about its own risks; it didn’t have internal information to the companies the investors had stake in, he said.

Hall asserted two liability theories under the Securities Exchange Act of 1934: a tipper-tippee theory turning on a breach of a duty Archegos owed to issuers and shareholders, and a misappropriation theory about a duty the banks had to Archegos. Archegos was a controlling shareholder for insider status given its beneficial ownership, he said, and the lower court misdefined material nonpublic information as just internal corporate information.

Fiduciary Breach

Judges pushed back on whether all controlling shareholders have the same fiduciary duties, even without information normally associated with insider trading such as gathered from being a company executive. They also resisted whether the banks’ hedged shares to limit exposure should be included in considering Archegos’ controlling ownership. Hall said the investors counted those as Archegos’ for control purposes as a traditional insider.

But even only counting its proprietary collateral, Archegos met the 5% threshold for reporting rules about beneficial ownership, he said.

The collapse’s timing suggests a breach of fiduciary duties, which the US District Court for the Southern District of New York ignored in dismissing investors’ claims, Hall said. A bank has to provide a client of a notice of default, which happened March 26, he said. But stock sales and meetings with material nonpublic information occurred starting two days before, he said.

Archegos built up massive beneficial ownership in seven companies including ViacomCBS Inc. and Discovery Inc. that saw huge selloffs through its implosion, investors’ brief filed in the appeals court said. Investors of affected companies in seven coordinated securities-fraud class actions asked the appellate panel to reverse the 2024 dismissal.

Banks had hedged Archegos’ swapped positions by buying shares of the underlying stock—when share prices moved adversely in March 2021, their client sought sales of certain positions, but couldn’t meet margin calls and defaulted, the Wall Street banks’ brief said. After Archegos asked for a managed wind-down plan, Morgan Stanley and Goldman didn’t agree, liquidating collateral and exiting the swap hedges, they said. Goldman and Morgan Stanley said the district court rightfully struck the suits given the brokers were closing out a contractual relationship with a defaulting counterparty, their brief said.

Judges Eunice C. Lee, Sarah A. L. Merriam, and Maria Araújo Kahn sat on the panel.

Multiple firms in addition to Hall’s represent plaintiff-appellants. Davis Polk represents Morgan Stanley. Cleary Gottlieb Steen & Hamilton LLP represents Goldman.

The case is In re: Archegos 20A Litig., 2d Cir., No. 24-1162, oral arguments 5/28/25.