Commodity Futures Trading Commission v. Archegos Capital Management LP

Background

The Commodity Futures Trading Commission (CFTC) sued Archegos Capital Management LP and its chief financial officer, Patrick Halligan. The CFTC alleged that they violated Section 6(c)(1) of the Commodity Exchange Act and CFTC Regulation 180.1 by using deceptive statements about Archegos’s swap portfolio.

Beginning in March 2020, Archegos pursued a long/short trading strategy involving long total-return swaps tied to individual securities and short swaps used to hedge those positions. The short swaps included exchange-traded-fund swaps and custom-basket swaps. The CFTC alleged that Archegos built large, concentrated, and illiquid positions, then made false or misleading statements about the size, composition, and liquidity of its portfolio to obtain additional trading capacity and preserve favorable trading terms. After securities prices fell sharply in March 2021, Archegos faced escalating margin calls and collapsed. Its counterparties unwound its positions, suffering losses in some cases.

The CFTC’s amended complaint contained one fraud count. Archegos and Halligan separately moved to dismiss it under Federal Rule of Civil Procedure 12(b)(6), which permits dismissal when a complaint does not state a legally sufficient claim for relief.

Regulatory-authority framework

Under Title VII of the Dodd-Frank Act, Congress assigned the Securities and Exchange Commission (SEC) authority over security-based swaps and the CFTC authority over swaps. The agencies share authority over mixed swaps. A security-based swap is based on a single security, a loan, or a narrow-based security index. A swap based on a broad-based security index or a portfolio of securities is generally within the CFTC’s authority. A mixed swap combines a reference subject to SEC authority with another financial or economic reference subject to CFTC authority.

The CFTC did not dispute that Archegos’s long swaps tied to individual securities were security-based swaps under the SEC’s exclusive authority. The court therefore focused on the exchange-traded-fund swaps and custom-basket swaps.

Exchange-traded-fund swaps

The court held that the exchange-traded-fund swaps referenced shares of individual exchange-traded funds. The fact that an exchange-traded fund might track a broad securities index did not change what the swaps directly referenced: an interest in the fund, not an interest in the fund’s underlying securities or index.

The court also rejected the CFTC’s argument that these instruments were mixed swaps. The court explained that a mixed swap must have multiple underlying references, including one within SEC authority and another within CFTC authority. The exchange-traded-fund swaps had only one reference—the fund share. The CFTC therefore failed to allege a plausible claim based on the exchange-traded-fund swaps.

Custom-basket swaps

The court considered the swap agreements governing the custom-basket swaps. Although those agreements were not expressly incorporated into the amended complaint, the court found them integral to the complaint because the CFTC’s theory relied heavily on their terms and effect. The court also noted that the CFTC had received the agreements during its pre-filing investigation.

The agreements gave Archegos, the counterparties, or both discretionary authority to change the securities included in the custom baskets. The court distinguished discretionary authority from unilateral authority: a party could have discretion even when a change required the other party’s consent. The court concluded that this contractual discretion meant the custom baskets were narrow-based rather than broad-based securities indexes. As a result, the CFTC failed to allege a plausible theory of liability based on the custom-basket swaps as well.

Disposition

Because the amended complaint did not plausibly state a claim involving swaps within the CFTC’s authority, the court granted Archegos’s and Halligan’s motions to dismiss. The court denied the CFTC’s request for leave to replead, finding that the CFTC had not shown that another complaint could correct the identified deficiencies and that amendment would be futile.

The court also denied the United States’ motion to intervene and stay discovery as moot. It directed the clerk to close the motions at ECF Numbers 42, 46, and 51 and to close the case. The opinion does not state that the dismissal was with or without prejudice.