Securities Regulation Daily Wrap Up, FRAUD AND MANIPULATION—2d. Cir.: Sale of Archegos positions before collapse was not insider trading, (Sep 17, 2025)

By Rodney F. Tonkovic, J.D.

Goldman Sachs and Morgan Stanley sold positions ahead of Archegos' s collapse, but they only had a commercial arrangement with that firm.

Affirming the district court, a Second Circuit panel held that a group of shareholders failed to plausibly allege that Goldman Sachs and Morgan Stanley engaged in insider trading before the collapse of Archegos. On appeal, the case hinged on whether there was a fiduciary relationship between any of the parties. The panel found no breach of fiduciary duty or similar relationship. Goldman and Morgan Stanley were not liable as tippees because Archegos was not a corporate insider owing a fiduciary duty. They were also brokers dealing at arms' length with Archegos and so owed it no duty (In re Archegos 20A Litigation, No. 24-1162-cv(L) (2d. Cir. Sept. 16, 2025)).

Archegos collapses. This action involves seven securities class actions arising out of the sudden collapse of Archegos Capital Management. Archegos, which was classified as a family office and had limited regulatory oversight, had amassed controlling positions in seven small-to-mid-cap companies. It was able to do this primarily through total return swaps with counterparties including Morgan Stanley & Co. LLC and Goldman Sachs Group, Inc. To limit their exposure, Goldman and Morgan Stanley purchased the same volume of the issuers' shares.

The issuers' stock prices dropped in March 2021, and Archegos lacked the liquidity to meet increasing margin calls. Morgan Stanley and Goldman learned of this from Archegos but declined to agree not to declare Archegos in default. Before the news became public, they divested themselves of the issuers' stocks. This allowed them to emerge unscathed but drastically decreased the share prices for the remaining shareholders. Archegos' founder, Bill Hwang, has since been sentenced to 18 years in prison and was ordered to pay over nine billion dollars in restitution.

Procedural background. In 2021, the appellants filed ten complaints alleging that Morgan Stanley and Goldman had engaged in insider trading. The actions were consolidated into seven cases, and an amended complaint was filed and later dismissed without prejudice. The second amended complaint, which contained essentially the same allegations, was also dismissed. The district court said that Archegos had shared no confidential information from the issuers and that information about its default was its own and not confidential for the purposes of insider trading.

At issue on appeal was the existence of any fiduciary relationship between the shareholders or Archegos and Goldman and Morgan Stanley. The panel found no breach of fiduciary duty or similar relationship, meaning that Goldman and Morgan Stanley had no legal obligation not to trade their Archegos positions or share information about Archegos' financial state.

Classical theory. The panel first found that the district court did not err in dismissing claims based on the classical theory of insider trading. Archegos was not a controlling shareholder of any of the issuers and so was not a corporate insider owing a fiduciary duty. While Archegos was a beneficial owner of the issuers, there were no allegations that Archegos had access to any issuer's internal information or control over any of their affairs.

Misappropriation. The panel also said that Archegos revealed no material nonpublic information belonging to the issuers. Even if the news of Archegos' impending collapse was material and non-public, Morgan Stanley and Goldman owed no fiduciary duties to Archegos—they only offered various brokerage services and, moreover, were contractually entitled to sell their Archegos positions upon its default. In other words, there was only a commercial arrangement between them. The panel also found that allegations that Morgan Stanley and Goldman engaged in insider trading by tipping failed for lack of particularity.

The case is No. 24-1162-cv(L).

Judge: Kahn, M.

Attorneys: Michael Ira Fistel, Jr. (Johnson Fistel, PLLP) for Alexander Shapovalov. Jeremy Alan Lieberman (Pomerantz LLP) for Felix Urman and The Kellner Newcomer Family Partnership. Carmine D. Boccuzzi, Jr. (Cleary Gottlieb Steen & Hamilton LLP) for Goldman Sachs Group Inc. Charles S. Duggan (Davis Polk & Wardwell LLP) for Morgan Stanley.

Companies: The Kellner Newcomer Family Partnership; Goldman Sachs Group Inc.; Morgan Stanley

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