Tan v. Goldman Sachs Group Inc.

Background

This opinion addressed seven coordinated proposed securities class actions arising from Archegos Capital Management, LP’s collapse. The plaintiffs represented investors in securities of seven issuers and sued Goldman Sachs Group Inc. and Morgan Stanley & Co. LLC. They alleged that Archegos built highly leveraged positions through total return swaps and that, after Archegos could no longer meet its margin obligations, the defendants sold their Archegos-related positions before the collapse became public. The plaintiffs claimed that these sales, and alleged tips to preferred clients, violated Section 10(b), Section 20A, and Section 20(a) of the Securities Exchange Act and Securities and Exchange Commission Rule 10b-5.

An earlier decision dismissed the first amended complaints but allowed the plaintiffs to amend. The plaintiffs then filed coordinated second amended complaints, adding allegations about Archegos’s disclosure of its financial crisis, the defendants’ sale of proprietary hedged shares, the termination of certain employees, increased trading volume, and government investigations.

Motion and Legal Standards

The defendants renewed their motion to dismiss under Federal Rule of Civil Procedure 12(b)(6) and the heightened pleading requirements of the Private Securities Litigation Reform Act. On a Rule 12(b)(6) motion, the court accepts well-pleaded factual allegations as true but does not accept conclusory statements. Securities-fraud claims must also describe the alleged fraud with particularity under Rule 9(b), and the Private Securities Litigation Reform Act requires particular facts supporting a strong inference that the defendants acted with an intent to deceive, manipulate, or defraud.

Classical Insider-Trading Theory

The plaintiffs first argued that the defendants were recipients of confidential information from Archegos and were liable under the classical theory of insider trading. The court explained that this theory requires a tipper to breach a duty by sharing confidential information, a tippee to know or have reason to know of that breach, and the tippee to use the information for the tippee’s own benefit.

The court held that the plaintiffs did not plausibly allege that Archegos shared confidential information belonging to the issuers. The alleged information concerned Archegos’s own swaps, margin accounts, and financial condition, and was unknown to the issuers. Because the information did not belong to the issuers, Archegos did not breach a duty to the issuers by sharing it, and the defendants did not acquire a derivative duty to the issuers.

The court also held that the plaintiffs did not plausibly allege that Archegos was an insider of the issuers. Although Archegos had economically large positions and influenced stock prices, the court said Archegos did not vote the shares, have access to the issuers’ confidential information, participate in their corporate affairs, or have the type of insider relationship associated with directors, officers, or other corporate insiders. The court therefore rejected the classical theory.

Misappropriation Theory

The plaintiffs alternatively claimed that the defendants misappropriated Archegos’s confidential information. Under this theory, a defendant must possess material, nonpublic information, owe a duty to keep it confidential, and breach that duty by trading on or revealing the information.

The court held that the plaintiffs did not adequately allege that the information Archegos disclosed was confidential. The agreements allegedly gave the defendants contractual rights to seize and sell Archegos’s collateral and unwind their transactions after a default. Archegos also voluntarily disclosed its financial condition during a call with its prime brokers while asking them to agree to a standstill. These allegations showed, in the court’s view, that Archegos did not retain exclusive use of the information or treat it as confidential.

The court further held that the defendants did not deceive Archegos by selling their positions. According to the second amended complaint, the defendants first triggered default or early-termination rights and thereby notified Archegos of their intent to trade. The court also rejected the argument that Archegos expected the defendants to sell only collateral and not their proprietary hedged shares, because the complaint alleged that Archegos understood the defendants’ hedging strategy and should have expected them to trade after terminating the swaps.

The plaintiffs also alleged that the defendants tipped preferred clients before Archegos’s collapse. The court found those allegations insufficient under Rule 9(b) and the Private Securities Litigation Reform Act. Increased trading volume, a decline in Discovery’s stock price before Morgan Stanley priced block trades, later employee terminations, and government investigations did not identify specific tips, recipients, trades connected to the tips, or the circumstances of the alleged tips. The court also found the proposed inference implausible in light of the plaintiffs’ allegation that Archegos itself directed substantial trading on March 24 to support the stock prices.

Sections 20A and 20(a)

The court dismissed the claims under Sections 20A and 20(a) because those claims require an adequately pleaded primary violation, such as a violation of Section 10(b) and Rule 10b-5. Since the plaintiffs failed to state a primary insider-trading claim, the derivative claims also failed.

Disposition

The court granted the defendants’ motion to dismiss with prejudice. It directed the Clerk to close the seven related cases, enter final judgment, and dismiss the complaints with prejudice.