24-1162-cv(L) In Re: Archegos 20A Litigation
In the United States Court of Appeals For the Second Circuit ___________
August Term 2024 Nos. 24-1162-cv(L), 24-1159 (CON), 24-1161 (CON), 24-1166 (CON), 24-1173 (CON), 24-1177 (CON), 24-1178 (CON)
IN RE: ARCHEGOS 20A LITIGATION * ___________
ARGUED: MAY 28, 2025 DECIDED: SEPTEMBER 16, 2025 ___________
Before: LEE, MERRIAM, and KAHN, Circuit Judges. ________________
Alexander Shapovalov is the lead plaintiff in one of seven putative class actions brought on behalf of shareholders (collectively, “Appellants”) in seven small-to-mid cap companies (the “Issuers”). They appeal from a judgment of the United States District Court for the Southern District of New York (Rakoff, J.) dismissing their claims. Appellants allege that Defendants Morgan Stanley & Co. LLC and Goldman Sachs Group (collectively, “Appellees”) provided prime brokerage services through margin lending and the execution of total return swaps with Archegos Capital Management, L.P. (“Archegos”), enabling Archegos to obtain nonpublic and highly leveraged positions in the Issuers’ stocks. But when the value of the Issuers’ stocks declined and Archegos was on the brink of collapse, Appellees traded their Archegos-related positions. In doing so, Appellees emerged from Archegos’ collapse virtually unscathed at the expense of ordinary retail investors. Appellants argue that Appellees’ conduct was insider trading.
* The Clerk of Court is respectfully directed to amend the caption accordingly. Appellants contend that the district court erred by dismissing their claims arising under both the classical and misappropriation theories of insider trading, as well as their claims under Sections 20A and 20(a) of the Securities Exchange Act of 1934. We disagree and hold that Appellants have failed to plausibly allege that Appellees engaged in insider trading. Appellants’ claim under the classical theory fails because Archegos did not owe a fiduciary or fiduciary-like duty to the Issuers and, thus, Appellees are not liable as Archegos’ tippees. Under the misappropriation theory, Appellants’ allegations also fall short because, as brokers dealing at arm’s length, Appellees did not owe a fiduciary or fiduciary-like duty to Archegos. Appellants’ alternative misappropriation claim, based on the theory that Appellees tipped their preferred clients that Archegos was about to collapse, also fails for lack of sufficient factual allegations. Finally, Appellants’ Section 20A and 20(a) claims fail because the amended complaint does not adequately allege an underlying violation of securities law.
We therefore AFFIRM the judgment of the district court.
________________
DAVID W. HALL, The Hall Firm, LTD, San Francisco, CA (Michael, I Fistel, Jr., Johnson Fistel, LLP, Marietta, GA, on the brief), for Plaintiff-Appellant.
CHARLES S. DUGGAN (Daniel J. Schwartz, on the brief), Davis Polk & Wardwell LLP, New York, NY, for Defendant-Appellee Morgan Stanley.
Carmine D. Boccuzi, Jr., Cleary Gottlieb Steen & Hamilton LLP, New York, NY, for Defendant-Appellee Goldman Sachs Group, Inc. ________________
2 MARIA ARAÚJO KAHN, CIRCUIT JUDGE:
This appeal stems from seven coordinated putative securities class actions
arising from the March 2021 collapse of Archegos Capital Management, LP
(“Archegos”). Archegos engaged in a type of financing known as total return
swaps (“TRS”) with various counterparties, including Appellees Morgan Stanley
& Co. LLC (“Morgan Stanley”) and Goldman Sachs Group, Inc. (“Goldman
Sachs”). 1 As a result, Archegos amassed controlling, nonpublic positions in the
stock of seven issuers: Gaotu Techedu Inc. (“Gaotu”), Vipshop Holdings Ltd.
(“Vipshop”), Tencent Music Entertainment Group (“Tencent”), ViacomCBS, Inc.
(“ViacomCBS”), IQIYI, Inc. (“IQIYI”), Baidu, Inc. (“Baidu”), and Discovery, Inc.
(“Discovery”) (collectively, the “Issuers”). In turn, Appellees, in an effort to limit
their market exposure, purchased, on their own, the same volume of Issuers’
shares as “proprietary hedged shares.” But when the Issuers’ stock prices fell in
March 2021, Archegos found itself overexposed and without the liquidity
necessary to meet Appellees’ increasing margin calls. Once Appellees learned that
1 Although Archegos primarily relied upon the TRS contracts to obtain its position in each Issuer’s stock, Appellees also provided some financing to Archegos known as margin lending. In this arrangement, Appellees loaned money to Archegos to purchase stock at a specified percentage of the stock’s cost, while Appellees held the remainder of the stock—the margin—in their own accounts.
3 Archegos could not pay its debt—and before the public was aware of Archegos’
imminent collapse—Appellees divested themselves of the Issuers’ stocks, thereby
drastically decreasing the share prices at the expense of the remaining
shareholders, including Appellants.
Appellants sought to represent a class of the Issuers’ shareholders as a part
of seven coordinated cases. They contend that, by selling their Archegos-related
positions before Archegos’ collapse became public, Appellees engaged in insider
trading in violation of Sections 10(b), 20A, and 20(a) of the Exchange Act, 15 U.S.C.
§§ 78j(b), 78t-1, & 78t(a), and 17 C.F.R. § 240.10b-5. For the following reasons, we
disagree and affirm the judgment of the district court.
BACKGROUND
I. FACTS
The following facts are taken from Appellants’ Second Amended Complaint
(“SAC”). As is required when reviewing a motion to dismiss under Rule 12(b)(6),
we accept all well-pleaded facts as true and draw all reasonable inferences in
Appellants’ favor. See Fink v. Time Warner Cable, 714 F.3d 739, 740–41 (2d Cir. 2013).
4 A. ARCHEGOS’ INVESTMENT STRATEGY
In 2001, Sung Kook Hwang founded Tiger Asia Management, LLC, and
Tiger Asia Partners, LLC (collectively, “Tiger Asia”), a hedge fund that was valued
at “over $5 billion at its peak.” App’x 299. In 2012, however, the SEC investigated
and subsequently entered into a settlement with Hwang and Tiger Asia based on
their “insider trading and market manipulation.” Id. As part of the settlement
with the SEC, Tiger Asia paid $44 million in disgorgement and civil penalties and
Hwang was banned “from managing money on behalf of clients for at least five
years.” Id. In a separate criminal action, “Tiger Asia pleaded guilty to one count
of criminal wire fraud . . . and agreed to forfeit more than $16 million in illegal
profits.” Id.
In 2013, Hwang created Archegos, which he classified as “a family office to
manage his own wealth.” Id. at 300. Under the SEC Family Office Rule, Archegos
was exempt from much regulatory oversight; as a result, Archegos “was not
required to regularly report information regarding its holdings and borrowing to
the SEC and the Financial Stability Oversight Council.” Id.
Despite its classification as a family office, Archegos “still operated as a
sophisticated investment firm.” Id. Beginning in early 2020, Archegos engaged in
5 a market manipulation scheme by acquiring non-public, highly-leveraged
positions in the Issuers, which were predominantly mid-to-small cap companies.
Archegos was able to finance these vast quantities of the Issuers’ stock through
TRS contracts with Appellees and other counterparties. A TRS contract is a
derivative contract that permits the client (Archegos) to receive the benefits of
owning stock without actually purchasing the underlying stock. Under a TRS
contract, the broker (Appellees) purchases an asset and pays the client the
appreciation of the stock’s price and dividends in exchange for a certain amount
of fees. If the value of the stock increases, the client receives the corresponding
increase in value from the broker. But if the stock value decreases, the broker
issues a margin call where the client must compensate the broker for the stock’s
decline. Because the broker owns the stock in a TRS contract, the client is not
subject to SEC reporting requirements for the underlying asset.
In a TRS contract, brokers bear the risk that a stock increases in value and
that they will be required to make payments to the client. Brokers may hedge
against this possibility by purchasing their own shares in addition to the shares
purchased through the TRS contract. Appellees did so here, purchasing the
Issuers’ stocks both under the TRS contracts and in their own proprietary accounts
6 “so the amount they would owe Archegos if the price rose would be covered by
the increased value of the stock that they held as a hedge.” Resp. at 8. If, however,
the stock price declined in value, the broker’s loss would be offset by the payments
the client owed to the broker.
Through the liquidity afforded by TRS contracts, Archegos beneficially
owned anywhere from 30–70% of each Issuer’s stock. From March 2020 to March
2021, Archegos’ assets under management “grew from about $1.5 billion to $35
billion.” App’x 316.
The TRS contracts had the additional benefit of allowing Archegos to
conceal its highly-leveraged positions through control of massive amounts of stock
in these small Issuers’ companies. This also allowed Archegos to “evade SEC
reporting requirements” and oversight from the market or regulators. Id. at 303.
Appellants allege that through these machinations, Archegos was able to quietly
increase the share prices of the Issuers’ stocks and reap great profits without
anyone’s knowledge, including the Issuers themselves.
B. The Fall of Archegos
During the week of March 22, 2021, Archegos’ scheme began to crumble.
After the market closed on Monday, March 22, one of the Issuers, ViacomCBS,
7 “announced a $2 billion secondary public stock offering.” Id. at 340. The next day,
ViacomCBS’s stock price plummeted. At the same time, “the adoption of interim
amendments implementing the Holding Foreign Companies Accountable Act”
caused the stock price of some “China-based [I]ssuers like Gaotu, [IQIYI], Baidu,
and Tencent” to decline. Id. at 341. Consequently, Archegos’ position in these
Issuers rapidly deteriorated, leaving it vulnerable to Appellees’ margin calls.
On March 23, 2021, Archegos unsuccessfully attempted to stymie the decline
in ViacomCBS’s stock price, and thus lessen its own liability to Appellees, by
executing “hundreds of millions of dollars” in trades. Id. From March 22, 2021,
until the end of the day on March 24, 2021, Archegos’ capital declined from $36.2
billion to $16.9 billion. Despite Archegos’ trading activity, ViacomCBS’s stock
price continued to decline, further exacerbating Archegos’ losses.
As Archegos’ positions in the Issuers sharply decreased in value, Appellees
began to issue margin calls that increased in volume over the next two days. After
the market closed on March 24, 2021, Archegos informed Appellees “that it would
not be able to meet the margin calls due the next day” and that its gross exposure
was “$120 billion” while it had only “$9-10 . . . billion in equity.” Id. at 342, 343.
To prevent a fire sale, “Archegos organized a group call” with Appellees and other
8 counterparties to request that they “enter into a standstill agreement” under which
Appellees “would agree not to declare Archegos in default while it wound down
its positions in an orderly manner.” Id. at 343.
Appellees rejected Archegos’ request to enter into a standstill agreement.
After the group call, Appellees began to trigger events of default and exercised
their early termination rights as to their Archegos-related positions. 2 By the end
of the day on March 26, 2021, Appellees had sold nearly $20 billion of the Issuers’
stock, including both their proprietary hedged shares and the shares they owned
on Archegos’ behalf. Ultimately, in the days after March 25, 2021, Goldman Sachs
and Morgan Stanley rapidly liquidated 80% and 90% of their proprietary shares in
the Issuers, respectively. By rushing to sell their Archegos-related positions,
Appellees avoided billions of dollars in losses at the expense of ordinary investors
who were unaware of Archegos’ impending collapse.
II. PROCEDURAL HISTORY
On October 12, 2021, Appellants filed ten virtually identical complaints
alleging that Appellees engaged in insider trading. The district court issued an
2Appellants contend that Appellees began selling their Archegos-related positions before they declared Archegos in default. See Appellants’ Br. at 51–52. As explained in further detail below, whether Appellees indeed did so is irrelevant to our analysis. 9 order coordinating the adjudication of the actions, consolidating the actions
brought by the shareholders of the same Issuers into seven cases, and instructing
the parties to file an amended complaint on behalf of all the Issuers’ shareholders.
Thereafter, on June 13, 2022, Appellants filed the First Amended Complaint
(“FAC”), alleging that Appellees engaged in insider trading in violation of Section
10(b) of the Securities Exchange Act, 15 U.S.C. § 78j(b), and SEC Rule 10b-5, 17
C.F.R. § 240.10b-5. Based on these insider trading claims, Appellants also brought
derivative causes of action under Section 20A and 20(a) of the Securities Exchange
Act, 15 U.S.C. §§ 78t-1, 78t(a), alleging that they traded in the Issuers’ stocks at the
same time the Appellees were selling their Archegos-related positions, thus
entitling Appellants to further relief.
Appellees filed an omnibus motion to dismiss, which the district court
(Crotty, J.) granted on March 31, 2023. See Tan v. Goldman Sachs Grp. Inc., No. 21-
cv-8413, 2023 WL 2753238 (S.D.N.Y. Mar. 31, 2023). As to Appellants’ tipper-tippee
claims asserted under the classical theory, the district court acknowledged the
plausibility that Archegos could be considered a corporate insider that owes a
fiduciary-like duty to the Issuers but found that the FAC contained “deficient
factual allegations” to demonstrate that Appellees breached any such duty. Id. at
10 *8. Specifically, the district court explained that “[Appellants] do not even attempt
to allege that Archegos shared this information to seek a personal benefit,” thus
foreclosing their theory of tipper-tippee liability. Id. The district court also rejected
Appellants’ misappropriation theory of insider trading because the FAC “fail[ed]
to adequately allege that [Appellees] breached any duty [they] may have had
towards Archegos.” Id. at *6. The district court’s dismissal was without prejudice
and granted Appellants leave to file a second amended complaint to address the
identified deficiencies.
Shortly thereafter, Appellants filed the SAC. Appellees renewed their
motion to dismiss. 3 On March 28, 2024, the district court dismissed the SAC with
prejudice. See Tan v. Goldman Sachs Grp. Inc., No. 21-cv-8413, 2024 WL 1357354
(S.D.N.Y. Apr. 1, 2024).
In dismissing the SAC, the district court noted that “[Appellants’] basic
allegations . . . have not changed.” Id. at *4. Rejecting Appellants’ tipper-tippee
claim asserted under the classical theory, the district court dismissed the claim
because the SAC did not plausibly allege that Archegos (1) was a corporate insider
3The coordinated cases were initially assigned to the Honorable Judge Crotty. After Appellees filed their second motion to dismiss, the cases were reassigned to the Honorable Judge Rakoff. 11 of any Issuer; (2) received confidential information from any Issuer; and (3) shared
any Issuer’s confidential information with Appellees. See id. at *6–7. As to the
misappropriation theory, the district court found that the SAC failed to allege that
Appellees (1) received material non-public information from Archegos and (2)
breached a duty to Archegos by selling the Issuers’ shares. See id. at *7–8.
Regarding Appellants’ alternative argument that Appellees were liable for tipping
preferred clients under the misappropriation theory, the district court found the
SAC lacked factual support. See id. at *8–9. The district court dismissed
Appellants’ Section 20A and 20(a) claims because they required an underlying
insider trading violation. See id. at *9. This appeal followed.
DISCUSSION
Whether Appellants’ insider trading claims are plausible largely turns on
the relationships between the relevant entities. 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. If neither duty exists, then
Appellees were not legally obliged to refrain from trading their Archegos-related
positions, or from sharing information about Archegos’ financial state. Because
12 we find that Appellants failed to adequately allege a breach of fiduciary duty or
similar relationship, we affirm the district court’s dismissal of their claims.
I. STANDARD OF REVIEW
“We review the grant of a motion to dismiss de novo, accepting as true all
factual claims in the complaint and drawing all reasonable inferences in the
plaintiff’s favor.” Fink, 714 F.3d at 740–41. “To survive a motion to dismiss, a
complaint must contain sufficient factual matter, accepted as true, to ‘state a claim
to relief that is plausible on its face.’” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009)
(quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)).
Allegations of fraud are held to a higher pleading standard. Under the
Private Securities Litigation Reform Act (“PSLRA”), 15 U.S.C. § 78u-4(b)(1), and
Federal Rule of Civil Procedure 9(b), the deceptive or fraudulent conduct must be
pled “with particularity.” Gamm v. Sanderson Farms, Inc., 944 F.3d 455, 463 (2d Cir.
2019); see also Fed. R. Civ. P. 9(b) (“In alleging fraud or mistake, a party must state
with particularity the circumstances constituting fraud or mistake.”).
II. APPLICABLE LAW
Insider trading consists of the unlawful trading in securities based on
material non-public information and “is well established as a violation of section
13 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.” S.E.C. v. Obus, 693
F.3d 276, 284 (2d Cir. 2012). We have recognized two theories of insider trading.
“Under the classical theory . . ., a corporate insider is prohibited from trading
shares of [a] corporation based on material non-public information in violation of
the duty of trust and confidence insiders owe to shareholders.” Id. (citing Chiarella
v. United States, 445 U.S. 222, 228 (1980)). The second theory—misappropriation—
“targets persons who are not corporate insiders but to whom material non-public
information has been entrusted in confidence and who breach a fiduciary duty to
the source of the information to gain personal profit in the securities market.” Id.
(citing United States v. O’Hagan, 521 U.S. 642, 652 (1997)). Under both theories, the
person who owes a fiduciary duty of trust and confidence can be liable for using
material non-public information to profit by trading on or “tipping” the
confidential information to others. See Salman v. United States, 580 U.S. 39, 42
(2016).
A. Classical Theory
Appellants assert that Appellees are liable under a “tipper/tippee” claim
arising under the classical theory of insider trading.
14 When considering a tipper-tippee claim under the classical theory, we assess
whether a corporate insider breached a duty to a company by disclosing the
company’s confidential information to a third party—the tippee—who then uses
that information for an improper purpose. See Dirks v. S.E.C., 463 U.S. 646, 659
(1983)). To prevail under this theory, a plaintiff must show that:
(1) the corporate insider was entrusted with a fiduciary duty; (2) the corporate insider breached his fiduciary duty by (a) disclosing confidential information to a tippee (b) in exchange for a personal benefit; (3) the tippee knew of the tipper's breach, that is, he knew the information was confidential and divulged for personal benefit; and (4) the tippee still used that information to trade in a security or tip another individual for personal benefit.
United States v. Newman, 773 F.3d 438, 450 (2d Cir. 2014), abrogated on other grounds
by Salman, 580 U.S. 39. 4
Appellants assert that Archegos “qualified as a controlling shareholder,”
thereby rendering it a “constructive insider” of each Issuer. Appellants’ Br. at 43.
Appellants argue that, as a “constructive insider,” Archegos had a fiduciary duty
not to disclose “any material nonpublic information about the security or issuer”
to Appellees or other counterparties. Id. at 32 (internal quotation marks and
4 Although Newman was decided in the context of a criminal prosecution, these same elements are required to prevail on a civil claim asserting tipper-tippee liability. See, e.g., Veleron Holding, B.V. v. Morgan Stanley, 117 F. Supp. 3d 404, 456 (S.D.N.Y. 2015). 15 emphasis omitted) (alteration adopted). Appellants contend that Archegos
breached its fiduciary duties to the Issuers when Archegos provided Appellees
with confidential information regarding its “impending collapse” during the week
of March 24, 2021. Id. at 42. According to Appellants, Appellees—as tippees—are
liable for front running the market and liquidating their Archegos-related
positions upon receiving this confidential information. We disagree.
In general, a “corporate insider” is an individual or entity who “enter[s] into
a special confidential relationship in the conduct of the business of the enterprise
and [is] given access to information solely for corporate purposes.” Dirks, 463 U.S.
at 655 n.14. This gives rise to “a relationship of trust and confidence between the
shareholders of a corporation and those insiders who have obtained confidential
information by reason of their position with that corporation.” Chiarella, 445 U.S.
at 228. Corporate insiders include “officers, directors, and other permanent
insiders of a corporation” as well as “attorneys, accountants, consultants, and
others who temporarily become fiduciaries.” O’Hagan, 521 U.S. at 652. In some
circumstances, controlling shareholders 5 may be considered corporate insiders
5 A controlling shareholder is one who either by virtue of owning the majority of a company’s shares, or through its role in the company, or both, exerts substantial influence over the company’s affairs. See, e.g., Tornetta v. Musk, 310 A.3d 430, 498–99 (Del. Ch. 2024).
16 where “they have the same sort of access to information as a result of their position
of power as the typical officer and director.” Steginsky v. Xcelera Inc., 741 F.3d 365,
370 n.5 (2d Cir. 2014) (internal quotation marks and citation omitted).
Archegos was not a corporate insider of any of the Issuers, and thus, did not
owe them a fiduciary or fiduciary-like duty. Appellants’ only basis for claiming
that Archegos was a corporate insider is the limited allegation that Archegos was
the beneficial owner of large quantities of each Issuer’s stock and the conclusory
assertion that this beneficial ownership resulted in “massive control over the price
of the stocks themselves.” Appellants’ Br. at 46 (internal quotation marks and
citation omitted). Archegos, however, did not own a majority of shares in any one
Issuer’s stock. Indeed, Appellees, not Archegos, through the TRS contracts,
actually owned the Issuers’ shares. Appellants’ own allegations support a
conclusion that Archegos was not a controlling shareholder of any Issuer.
There is no allegation in the SAC that Archegos had access to any Issuer’s
internal corporate information or exercised control over any Issuer’s corporate
affairs so as to render it a corporate insider. Under Supreme Court precedent, an
entity does not become a corporate insider based solely on its beneficial ownership
17 of stock. 6 See Chiarella, 445 U.S. at 227 (holding that a fiduciary-like duty applies
to corporate insiders based on their “access to inside information intended to be
available only for a corporate purpose”). As we have explained, a corporate
insider is one who, by virtue of their position within the corporation and access to
the corporation’s confidential information, obtains a fiduciary duty to safeguard
that information on behalf of the shareholders. See Steginsky, 741 F.3d at 370 n.5;
see also Sawant v. Ramsey, 742 F. Supp. 2d 219, 238 (D. Conn. 2010) (finding that a
“major shareholder” was not a corporate insider because he “did not participate
in the development, marketing, or business planning” of the corporation).
Archegos’ beneficial ownership of stock in the Issuers did not empower it to
vote its shares, influence corporate decisions, or access internal corporate
information. See Tan, 2024 WL 1357354, at *7. Archegos did not “obtain[]
confidential information by reason of [its] position with [the Issuers],” in the way
that an officer or director of a corporation would do. Chiarella, 445 U.S. at 228. Nor
6 Appellants identify one case, in which the Southern District of New York recognized that individuals who “beneficially owned a significant portion” of a corporation could be considered corporate insiders. Gruber v. Gilbertson, No. 16-cv-9727, 2021 WL 2482109, at *14 (S.D.N.Y. June 17, 2021). But in so holding, the district court also relied upon the individuals’ participation in “the day-to-day business,” finding that they directed financial decisions and replaced corporate leadership. Id. Thus, Appellants cite to no authority, and we are aware of none, demonstrating that beneficial ownership may, on its own, be sufficient to render an individual or entity a corporate insider. 18 did Archegos act on the Issuers’ behalf in a manner giving rise to a relationship of
trust and confidence, such as when an attorney or consultant works for a
corporation. See O’Hagan, 521 U.S. at 652. The only influence Archegos arguably
exercised over the Issuers was its manipulation of their share prices through
derivative contracts and margin lending. This activity, while undoubtedly able to
shift the market, does not constitute the type of influence over internal corporate
affairs or access to information that would give rise to a fiduciary relationship
between Archegos, as a corporate insider, and the Issuers.
Consequently, Appellants’ allegations fall well short of demonstrating that
Archegos possessed power or influence over any of the Issuers’ day-to-day or
long-term operations or had access to any of the Issuers’ confidential information.
The SAC does not plausibly allege that Archegos was a corporate insider, or
otherwise owed a fiduciary or fiduciary-like duty to the Issuers’ shareholders.
Accordingly, the district court did not err in dismissing Appellants’ claims
asserted under the classical theory of insider trading.
B. Misappropriation Theory
Appellants also assert that Appellees are liable for insider trading under the
misappropriation theory. Unlike the classical theory, which “targets a corporate
19 insider’s breach of duty to shareholders with whom the insider transacts[,] the
misappropriation theory outlaws trading on the basis of nonpublic information by
a corporate ‘outsider’ in breach of a duty owed not to a trading party, but to the
source of the information.” O’Hagan, 521 U.S. at 652–53. Put differently, the
misappropriation theory targets persons who were entrusted with material non-
public information, and in violation of their fiduciary duty to the source of that
information, used the information for their own gain. See Obus, 693 F.3d at 284.
To state a claim under the misappropriation theory, a plaintiff must
plausibly allege “(1) that the defendant possessed material, nonpublic
information; (2) which he had a duty to keep confidential; and (3) that the
defendant breached his duty by acting on or revealing the information in
question.” S.E.C. v. Suman, 684 F. Supp. 2d 378, 387 (S.D.N.Y. 2010) (quoting S.E.C.
v. Lyon, 605 F. Supp. 2d 531, 541 (S.D.N.Y. 2009)), aff’d, 421 F. App’x 86 (2d Cir.
2011). The defendant may also be liable if, with the requisite scienter and for his
own benefit, he tipped the material non-public information to a third party. See
Obus, 693 F.3d at 285.
Appellants contend that Appellees are liable under the misappropriation
theory in two ways. First, they allege that Appellees received confidential
20 information regarding Archegos’ imminent collapse, and Appellees, in breach of
their fiduciary duty to Archegos, traded their Archegos-related positions in
advance of issuing notices of default. Second, Appellants argue that Appellees
violated their duty of confidentiality to Archegos by tipping information
regarding Archegos’ financial predicament to their preferred clients, who, in turn,
traded on that confidential information. For the reasons explained below, the SAC
fails to adequately allege a violation under either theory.
1. Misappropriation By Trading
Even assuming, without deciding, that the news of Archegos’ collapse
constituted material non-public information, Appellants’ claim still fails because
Appellees did not owe any fiduciary duties to Archegos. “[A] fiduciary
relationship, or its functional equivalent, exists only where there is explicit
acceptance of a duty of confidentiality or where such acceptance may be implied
from a similar relationship of trust and confidence between the parties.” United
States v. Falcone, 257 F.3d 226, 234 (2d Cir. 2001). The acceptance of such a duty is
crucial because “a fiduciary duty cannot be imposed unilaterally by entrusting a
person with confidential information.” Id. (internal quotation marks omitted).
Ultimately, the hallmark of a fiduciary relationship is that “the party in whom
21 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.” Id.
at 234–35. Conversely, parties to a transaction who negotiate at arm’s length are
generally not considered to be fiduciaries of each other absent an agreement to the
contrary. See Spinelli v. Nat’l Football League, 903 F.3d 185, 208 (2d Cir. 2018).
The SAC does not allege that Appellees entered into an agreement with
Archegos to act in its best interest or that Appellees ever agreed to serve as
Archegos’ fiduciaries. Rather, the SAC alleges only that Appellees offered
Archegos various brokerage services. More importantly, the SAC acknowledges
that Appellees were contractually entitled to sell their Archegos-related positions
upon Archegos’ default. This type of commercial arrangement between adverse
parties indicates that Appellees negotiated with Archegos at arm’s length. See In
re Mid-Island Hosp., Inc., 276 F.3d 123, 130 (2d Cir. 2002) (“When parties deal at
arm[’]s length in a commercial transaction, no relation of confidence or trust
sufficient to find the existence of a fiduciary relationship will arise absent
extraordinary circumstances.”) (internal quotation marks omitted) (alteration
adopted). Nor does the SAC contain allegations that would support the existence
of an additional relationship of confidence or trust to Archegos from which a
22 fiduciary obligation could be implied. Cf. United States v. Kosinski, 976 F.3d 135,
148 (2d Cir. 2020) (finding that although “an arm’s length relationship is not by
itself a fiduciary relationship,” such a fiduciary relationship existed where there
was an express agreement to hold information confidential through an
employment contract) (internal quotation marks omitted) (alteration adopted)).
Viewing all the SAC allegations in Appellants’ favor, the conclusory statements
about the parties’ “history, pattern, practice, course of dealing, [and] relationship
with regard to the prime brokerage, margin lending, and other brokerage-client
relationships” are insufficient to imply a fiduciary relationship and state a
plausible claim. App’x 364. The SAC fails to plausibly allege a key element of
insider trading: the existence of a fiduciary-like duty. 7
2. Misappropriation By Tipping
Alternatively, Appellants argue that Appellees tipped their so-called
“preferred clients” about Archegos’ imminent collapse, thereby breaching their
fiduciary duties to Archegos. In support of this theory, Appellants cite
7 Given Appellants’ failure to plausibly allege a fiduciary duty, we need not address whether (1) news of Archegos’ impending collapse constituted material non-public information and (2) Appellees’ trading of Archegos-related positions constituted a breach of Appellees’ fiduciary duty through the use of a deceptive device. See O’Hagan, 521 U.S. at 654 (“Deception through nondisclosure is central to the theory of liability for which the Government seeks recognition.”). Accordingly, Appellants’ misappropriation theory premised on Appellees’ trading of the Issuers’ stocks in violation of a duty to Archegos fails. 23 circumstantial evidence that they claim indirectly demonstrates that Appellees
must have encouraged their preferred clients to front-run the market and trade
Archegos-related positions. Id. at 360–66. Specifically, Appellants state that (1) the
trading volume in the Issuers’ stocks “spiked” on March 24, 2021, id. at 360; (2) the
stock price of Discovery dropped by 14% before Defendant Morgan Stanley
executed a block trade of Archegos collateral; (3) the SEC and Department of
Justice were investigating Morgan Stanley’s sale and trading practices relating to
block trades; and (4) two Morgan Stanley employees who were involved with
these trades were terminated. Although we have already determined that
Appellees owed no fiduciary-like duty to Archegos, these claims also fail for lack
of particularity.
We recognize that “because insider tips are typically passed on in secret, it
is often impractical to require plaintiffs to allege these details with particularity,”
and thus, “Rule 9(b) may be relaxed to allow a plaintiff to plead facts that imply
the content and circumstances of an insider tip.” S.E.C. v. One or More Unknown
Traders in Securities of Onyx Pharms., Inc., 296 F.R.D. 241, 248 (S.D.N.Y. 2013).
Although Rule 9(b) “is relaxed as to matters peculiarly within the adverse parties’
24 knowledge, the allegations must then be accompanied by a statement of the facts
upon which the belief is founded.” Segal v. Gordon, 467 F.2d 602, 608 (2d Cir. 1972).
Even though Appellants allege that much of the information related to
Appellees’ alleged tipping of preferred clients would be in Appellees’ exclusive
possession, the SAC fails to plead sufficient facts to imply the content and
circumstances of such tips. For example, the allegation that trading volume in the
Issuers’ stocks spiked on March 24, 2021, does not support a conclusion that
Appellees tipped their clients about Archegos’ financial state. Indeed, the SAC
contradicts this allegation, asserting that on that date, Archegos “directed
hundreds of millions of dollars of additional trading in the Issuers in a fleeting
effort to defend these stock prices,” App’x 341 (providing an alternative
explanation for the spike in trading). As the district court aptly summarized:
“Without particular factual allegations regarding the tips, it is an entirely
conjectural leap to disregard Archegos’s flurry of trading activity and instead to
attribute the movement in the Issuers’ stocks to improper unidentified trading by
[Appellees’] unidentified tippees.” Tan, 2024 WL 1357354, at *9. Accordingly, the
SAC’s allegation that Appellees engaged in insider trading by tipping preferred
clients fails.
25 C. Section 20A and 20(a) Claims
Appellants’ Section 20A and 20(a) claims are likewise properly dismissed.
“To state a claim under Sections 20(a) and 20A of the Exchange Act, a plaintiff must
allege a primary violation, such as one under Section 10(b) and Rule 10b-5.” Ark.
Pub. Emps. Ret. Sys. v. Bristol-Myers Squibb Co., 28 F.4th 343, 356 (2d Cir. 2022).
Because Appellants have failed to plausibly allege insider trading, they cannot
sustain their Section 20A and 20(a) claims.
CONCLUSION
For the reasons set forth above, we AFFIRM the judgment of the district
court.