Summary
This Second Circuit opinion affirms the district court's dismissal of a putative securities class action alleging that investment banks engaged in insider trading during the March 2021 collapse of Archegos Capital Management. The court held that the plaintiffs failed to plausibly allege either a classical tipper-tippee theory or a misappropriation theory of insider trading because Archegos did not owe a fiduciary duty to the issuers and the banks did not owe a fiduciary duty to Archegos. Consequently, the court also affirmed the dismissal of the plaintiffs' derivative claims under Sections 20(a) and 20A of the Securities Exchange Act of 1934.
Topics
Practice areas
Questions Presented
- Whether the shareholders plausibly alleged classical-theory insider trading based on the assertion that Archegos was a corporate insider or constructive insider of the issuers and that Morgan Stanley and Goldman Sachs were liable as tippees.
- Whether the shareholders plausibly alleged misappropriation-theory insider trading based on an alleged fiduciary or fiduciary-like duty owed by Morgan Stanley and Goldman Sachs to Archegos.
- Whether the shareholders plausibly alleged that Morgan Stanley and Goldman Sachs tipped preferred clients about Archegos's impending collapse with sufficient particularity under Rule 9(b).
- Whether the Section 20A and Section 20(a) claims could proceed without a plausibly alleged underlying securities-law violation.
Holdings
- The shareholders failed to plausibly allege that Archegos was a corporate insider or constructive insider of any issuer, because its alleged beneficial ownership did not give it access to confidential corporate information, authority over corporate affairs, or a fiduciary or fiduciary-like duty to the issuers' shareholders. Morgan Stanley and Goldman Sachs therefore could not be liable as tippees under the classical theory.
- The shareholders failed to plausibly allege that Morgan Stanley or Goldman Sachs owed Archegos a fiduciary or fiduciary-like duty. The parties' arm's-length commercial brokerage and financing arrangements, including contractual rights to sell positions upon default, did not create the required duty.
- The alternative tipping theory failed because the second amended complaint did not plead sufficient facts to imply the content and circumstances of any alleged tips, even though Rule 9(b) may be relaxed for information peculiarly within the defendants' knowledge.
- The Section 20A and Section 20(a) claims were properly dismissed because those claims require an adequately pleaded underlying securities-law violation, and the shareholders failed to plausibly allege insider trading.
Key quotations
“To overcome the motion to dismiss, Appellants must allege facts showing that either (1) Archegos owed a fiduciary or fiduciary-like duty to the Issuers’ shareholders or (2) Appellees owed a fiduciary or fiduciary-like duty to Archegos.” (12)
“Under Supreme Court precedent, an entity does not become a corporate insider based solely on its beneficial ownership of stock.” (16-17)
“The hallmark of a fiduciary relationship is that “the party in whom confidence is reposed has entered into a relationship in which he or she acts to serve the interests of the party entrusting him or her with such information.”” (21)
“Because Appellants have failed to plausibly allege insider trading, they cannot sustain their Section 20A and 20(a) claims.” (25)
Factual background
Archegos Capital Management used total return swaps and margin lending to obtain highly leveraged, nonpublic positions in the stock of seven issuers. Morgan Stanley and Goldman Sachs provided prime brokerage services and hedged their exposure by purchasing shares for their own accounts and on Archegos's behalf. When Archegos could not meet margin calls in March 2021, the banks exercised termination and default rights and rapidly liquidated large positions before the public learned of Archegos's collapse. Shareholders alleged that the banks traded on material nonpublic information and tipped preferred clients.
Procedural history
Shareholders filed ten substantially identical complaints in October 2021. The district court coordinated and consolidated the actions into seven cases, dismissed the first amended complaint without prejudice under Rule 12(b)(6), and granted leave to amend. After the second amended complaint was filed, the district court dismissed it with prejudice on March 28, 2024. The Second Circuit affirmed.