Goldman Sachs (GS) and Morgan Stanley (MS) have won an appeal filed by stock investors who claimed that insider trading by the Wall Street giants played a role in the collapse of Archegos Capital, a family office, in March 2021. This victory comes after a US district court dismissed the lawsuit in early 2024.
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On Tuesday, the US Court of Appeals in Manhattan delivered a judgment that concluded that the bankers were not liable for allegedly giving a heads-up to their clients about Archegos’ impending collapse. The investors had alleged that both banks warned select clients about Archegos Capital’s financial trouble before its ultimate collapse, allowing these clients to close their stock positions early to avoid losses.
However, the appeals court judgment, rendered by Judge Maria Araújo Kahn, found no evidence of such a tip-off. The ruling also pointed out that there was no agreement that the bank would act in Archegos’ interest.
The judgment comes about three months after the two banks, alongside Wells Fargo (WFC), agreed to pay a total of $120 million to settle a similar case with shareholders in ViacomCBS (now Paramount Skydance (PSKY).
How Archegos Fell
Archegos’s fall traces back to its founder, Sung ‘Bill’ Hwang, who entered into total return swap contracts, creating about $160 billion of stock exposure for the company. This means that Archegos sought to gain from the price appreciation or losses of the stocks involved in the financial contract without owning them.
However, when the prices of the stocks started to tumble, Archegos couldn’t meet margin calls, or the requests for more collateral, from its lenders to cover its highly leveraged positions in those stocks.
The company’s inability to pay compelled its prime brokers to liquidate $20 billion of Archegos’ stock positions. This sent shockwaves through the market, culminating in the loss of billions of dollars for both Archegos and the banks that funded it.
Investors Allege Insider Trading
Following Archegos’ fall, Goldman Sachs and Morgan Stanley were dragged to court in over seven lawsuits by investors who claimed the banks used their knowledge of Archegos’ financial troubles to dump billions of dollars of stock investments in shares Hwang was exposed to. Apart from ViacomCBS, these stocks include Warner Bros. Discovery (WBD) and Chinese shares such as Baidu (BIDU).
Losses from the collapse of Archegos trickled down to banking institutions such as Credit Suisse—which was acquired by Swiss banking giant UBS (UBS) in 2023—and Japanese banking group Nomura (NMR).
Meanwhile, Hwang and ex-Archegos CFO, Patrick Halligan, were later found guilty of fraud in July 2024. Later on, they received prison sentences of 18 years and 8 years, respectively.
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