2nd Circuit Clears Prime Brokers in Archegos Case: Limits on Fiduciary Duty & Insider Claims

The recent decision in In re: Archegos 20A Litigation, 2nd Cir., Nos. 24-1159, -1161, -1162, -1166, -1173, -1177 & -1178, decided September 16, 2025, provides landmark clarification on insider trading law as it applies to prime brokerage and leveraged financial structures. [2][6]

Key Holdings: The appeals court unanimously held that neither of the two central theories of insider trading liability could be established under the facts alleged: (1) under the classical theory, Archegos did not owe a fiduciary duty to the issuers because it lacked shareholder control, did not vote shares, could not influence board decisions, nor did it have access to issuers’ internal nonpublic information; (2) under the misappropriation theory, Goldman and Morgan Stanley did not owe Archegos a fiduciary duty and thus could not be liable for misusing confidential information. Moreover, the complaint did not adequately allege tipping of nonpublic information to preferred clients. [2][6]

Factual Background: Archegos built substantial exposure (via total return swaps and margin lending) in seven issuers—including ViacomCBS, Discovery, Baidu—amassing stock exposure estimated at $160 billion. At the critical juncture in March 2021, Goldman and Morgan Stanley rapidly sold off their swap-related and proprietary shares (roughly 80–90% of their “proprietary shares”) in these issuers to limit exposure, thereby avoiding billions of dollars in losses while retail investors suffered. [2][1]

Strategic Implications: The decision reinforces that prime brokers, even when they are deeply engaged in financing and swaps with clients, are not automatically treated as fiduciaries to those clients or to companies whose underlying shares are indirectly held. Contracts negotiated at arm’s length and the absence of control or voting power are essential to avoiding fiduciary duties. Firms should ensure that prime brokerage agreements explicitly disclaim such duties, maintain proper documentation regarding rights to liquidate or hedge upon default, and take care in avoiding perceived tipping activity.

Open Questions: Several key issues remain unresolved: Does the ruling leave room for liability under different factual patterns—e.g., where a client has majority voting power or direct access to corporate affairs? What about cases involving more overt preferential treatment of some clients or communication of nonpublic information? Also, to what extent will state-level claims (like those by ViacomCBS investors) proceed differently than federal securities cases? These remain gray areas that future plaintiffs will presumably test.