Second Circuit upholds dismissal of insider trading claims linked to Archegos incident

The U.S. Court of Appeals for the Second Circuit recently upheld the dismissal of claims against two banks involved in the Archegos Capital Management, L.P. collapse. Shareholders alleged that the banks engaged in insider trading using nonpublic information about Archegos’s impending failure to their advantage, avoiding significant losses. However, the court found that the claims were unfounded due to the absence of a fiduciary duty owed by Archegos to the companies affected or by the banks to Archegos. This ruling highlights the critical importance of a fiduciary duty when determining liability for insider trading.

In contrast, the SEC’s case against Panuwat in the “shadow trading” scenario showed a different outcome. The court upheld a jury verdict that found Panuwat guilty of improperly trading a competitor’s stock based on confidential information regarding his company’s upcoming acquisition. The court reasoned that Panuwat’s employment relationship, the company’s insider trading policies, and confidentiality obligations established the necessary duty that was lacking in the Archegos case. Panuwat’s case is now under appeal to the Ninth Circuit, showing the ongoing legal battles regarding insider trading and fiduciary duties.

These cases emphasize the critical role of a fiduciary or fiduciary-like duty in the analysis of insider trading issues under the Securities Act of 1934 and Rule 10b-5. The determination of whether such a duty exists depends on the specific details and relationships between the parties involved, as seen in the contrasting outcomes of the Archegos and Panuwat cases.

The Archegos case centered on the banks’ actions following Archegos’s default on margin calls. The court assessed whether the plaintiffs had adequately demonstrated claims of insider trading under both the “classical” and “misappropriation” theories. Under these theories, a breach of fiduciary duty or similar duty arising from a relationship of trust and confidence is crucial. However, the court found that the plaintiffs failed to establish the required duty under either theory.

The plaintiffs argued that Archegos’s substantial positions in several issuers made it a controlling shareholder and “constructive insider” of those companies. They claimed this created a fiduciary relationship under the classical theory. The court rejected this argument, stating that merely owning large-quantity swaps in the issuers’ stock did not automatically grant Archegos insider status or access to confidential information.

Additionally, the plaintiffs contended that the banks’ relationship with Archegos established a fiduciary duty under the misappropriation theory. The court dismissed this argument, noting the absence of an agreement between the banks and Archegos to act in the latter’s best interest or as fiduciaries. The commercial nature of the relationship between Archegos and the banks did not create a duty of confidentiality, as confirmed by longstanding Second Circuit rulings.

On the other hand, Panuwat’s case involved allegations that he traded a third company’s securities using confidential information obtained through his employment. The court found that Panuwat breached a duty of confidentiality owed to his employer, as supported by agency law principles and the agreements he signed. Despite Panuwat’s claims on appeal, asserting the absence of a duty, the evidence presented during the trial upheld the fiduciary duty owed to his employer, unlike the situation in the Archegos scenario.