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Second Circuit Affirms Dismissal Of Putative Class Actions Premised On Alleged Insider Trading Activity Surrounding Hedge Fund’s Collapse
09/23/2025On September 16, 2025, the United States Court of Appeals for the Second Circuit affirmed the dismissal of seven coordinated putative class actions asserting insider trading claims under the Securities Exchange Act of 1934 against certain hedge fund counterparties in connection with trading activity surrounding the hedge fund’s collapse. In re Archegos 20A Litig.,—F.4th—, 2025 WL 2652262 (2d Cir. 2025). Defendants provided financing for the hedge fund’s beneficial acquisition of substantial positions in the stock of seven issuers, but defendants themselves actually purchased those shares; in addition, defendants purchased their own proprietary positions in the same stocks as a hedge. Plaintiffs, purporting to represent a class of the issuers’ shareholders, alleged that defendants divested themselves of their positions in the issuers’ stock after learning the hedge fund could not meet its margin calls but before the public became aware of the same information. Id. at *1. The Second Circuit held that plaintiffs could not maintain an insider trading claim because they failed to allege that they were owed a fiduciary or fiduciary-like duty by the hedge fund or that defendants owed such a duty to the hedge fund.
The Second Circuit first addressed plaintiffs’ argument under a “classical theory” of insider trading, which prohibits a corporate insider from trading a corporation’s shares based on material non-public information in violation of the duty of trust and confidence insiders owe to shareholders, or from disclosing such information to a third party. Id. at *5. Plaintiffs’ theory was that the hedge fund qualified as a controlling shareholder of the issuers in whose stocks it traded and became a constructive insider of each company, thus owing a duty not to disclose any material nonpublic information. Id. But the Second Circuit held the hedge fund was not an insider. Id. The Court explained that, while the hedge fund was the beneficial owner of significant positions (from 30–70% of each issuer’s stock), an entity does not become an insider based solely on beneficial ownership of stock. Id. at *6. Moreover, plaintiffs did not allege that the hedge fund had access to any internal corporate information or exercised control over any of the companies. Id. The Court observed that, while the hedge fund’s trading activity may have impacted stock prices, such conduct “does not constitute the type of influence over internal corporate affairs or access to information that would give rise to a fiduciary relationship” between the fund and the companies in which it transacted. Id.
The Second Circuit then addressed plaintiffs’ contention that defendants were liable for insider trading under a “misappropriation theory” of insider trading, which outlaws trading on the basis of nonpublic information obtained by a corporate “outsider” in breach of a duty owed not to a trading party, but to the source of that information. Id. at *7. Plaintiffs asserted that defendants received confidential information regarding the hedge fund’s collapse by virtue of their relationship with the hedge fund, and in breach of a duty owed to the hedge fund, traded in the issuers’ stock based on that information before it became public. Id. Plaintiffs also claimed that defendants “tipped” their “preferred clients” about the hedge fund’s predicament, and those clients also traded on that information. Id.
The Second Circuit rejected this theory, holding that defendants had no fiduciary duty to the hedge fund. Id. The Second Circuit noted that there was no allegation that defendants entered into any agreement with the hedge fund to act in its best interest or serve as a fiduciary, or to otherwise maintain the hedge fund’s confidence and trust, as plaintiffs alleged only that defendants provided brokerage services. Id. The Second Circuit also noted that defendants were contractually entitled to sell the at-issue stock in the event of the hedge fund’s default. Id. Collectively, this indicated that defendants negotiated with the hedge fund at arm’s length, rather than serving as its fiduciaries. Id.
In addition, the Second Circuit held that plaintiffs failed to plead with particularity what supposed tips were shared by defendants with their preferred clients. Id. at *8. While plaintiffs alleged that trading volume in the issuers’ stocks “spiked,” the Second Circuit explained that this alone did not suggest defendants tipped their clients, and that plaintiffs’ complaint itself supported an alternative explanation for this additional trading, alleging that the hedge fund “directed hundreds of millions of dollars of additional trading in the stocks” to defend these stocks’ prices. Id. The Second Circuit agreed with the district court that it was “an entirely conjectural leap” to disregard the hedge fund’s own conduct and attribute stock movement to improper conduct by defendants. Id.
