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A US judge on Thursday ended investor litigation against two banking giants, Goldman Sachs Group Inc and Morgan Stanley. The lawsuits accused them of market manipulation and insider trading, which allegedly contributed to the swift downfall of Bill Hwang's Archegos Capital Management in March 2021.
Unprecedented Financial Meltdown
Reuters noted that Archegos Capital, once valued at a colossal $36 billion, was mired down by Hwang's massive leverage through financial instruments like total return swaps. These contracts allowed him to amass an enormous position in various stocks, notably ViacomCBS, Discovery, and Baidu. This strategy inflated the firm's exposure to an estimated $160 billion worth of stocks.
According to US News, investors claimed that insider information gave Goldman Sachs and Morgan Stanley an unfair advantage, allowing them to sell their stocks and avoid the extreme losses that Archegos suffered due to failing to meet margin calls. The legal battle was to hold the banks accountable for the damages sustained by investors who were caught in the wildfires of this financial collapse.
The Judicial Verdict
US District Judge Jed Rakoff's decision to dismiss the claims with prejudice stops further pursuing these allegations in court. The justification for his ruling will be disclosed in a subsequent opinion.
Responses to these developments have been tepid, with lawyers for the investors unavailable for comment and Morgan Stanley opting for silence. Goldman Sachs has also withheld immediate reaction.
Broader Impact on the Banking Sector
This event sent shockwaves through the industry, causing significant losses for other banking institutions like Credit Suisse, which later merged with its Swiss counterpart UBS and Japan's Nomura Holdings.
What Lies Ahead for Archegos Executives
Looking ahead, Hwang and Archegos' former CFO Patrick Halligan face a criminal trial set for May 8 in Manhattan. They have both entered pleas of not guilty to various charges, including securities fraud, and a lengthy trial process is anticipated.
Photo: Goldman Sachs Newsroom
