Written by Sajjad Momin

Introduction 

The 2021 collapse of Archegos Capital Management (“Archegos”), followed by the recent In re Archegos 20A Litigation, revealed a stark gap between the realities of financial markets and the reach of insider-trading law. Archegos, a family office, relied heavily on total-return swaps and margin loans to accumulate concentrated and largely hidden positions in a small set of publicly traded companies. When its leveraged portfolio began to unravel, the prime brokers (the large banks that provided financing) swiftly liquidated their hedged exposures, cushioning their own losses while precipitating sharp declines in the underlying share prices. Ordinary investors and shareholders bore the brunt of this fallout, while the key actors who possessed and acted upon market-moving, non-public information escaped liability under U.S. insider-trading regime. 

In the ensuing litigation by the shareholder alleging insider-trading violations against the prime brokers/banks, the courts dismissed claims on the ground that insider-trading liability, under both the classical and misappropriation theories, requires a fiduciary or fiduciary-like duty to have a case of insider trading. The Second Circuit affirmed that Archegos owed no duty to the issuers of the securities it traded, and that the prime brokers owed no duty to Archegos. In doing so, the judiciary reaffirmed a narrow, duty-based conception of insider trading. It held that trading on material non-public information is unlawful only when it involves misappropriation or breach of trust, not when it simply exploits informational advantages.  

Systemic Risk, Opaque Leverage, and Information Asymmetry in Modern Markets 

It is a truism that today, across major market economies, stock markets often exhibit volatile swings. The Archegos episode shows how hidden leverage and asymmetric information can amplify those swings. Regulators found that Archegos’ prime brokers held extraordinarily large stakes ranging  at 5–45% of the outstanding shares of each affected company, which is  many times the normal trading volume. Because these derivative positions were opaque, Archegos’s sheer scale was unknown to public markets. Once margin calls hit, banks scrambled to sell the collateral stock, thereby accelerating price declines before outsiders could react. This concentration of risk created a fragility to market shocks where, although the broad market indices barely budged, the collapse could have spilled over to other markets given how highly leveraged and correlated the positions were. In short, this asymmetric knowledge and opacity produced a systemic threat. 

The Archegos case further underscores a failure of transparency. A handful of well-connected institutions held material non-public information, and acted on it in a way that imposed losses on general uninformed investors. Principally, financial markets require that no one party can trade on “secret” information to the market’s detriment. Yet under current law, prime brokers at arm’s length with a client owe no confidentiality obligation absent an explicit agreement. In Archegos, the banks were contractually entitled to liquidate collateral and had no duty to preserve Archegos’ confidences. U.S. law therefore deemed their trades lawful despite the apparent unfairness. 

The Limits of the Fiduciary-Duty Framework in Insider Trading Law 

Under the misappropriation theory, as propounded in the landmark case of United States v. O’Hagan, 521 U.S. 642 (1997), a person commits fraud in connection with a securities trade if they trade on confidential information in breach of a duty to the source of that information. But to prove that, U.S. courts require an explicit fiduciary or confidential relationship to establish such a duty. In Archegos, plaintiffs alleged that the banks learned of Archegos’ looming margin collapse and traded on that knowledge. However, the Second Circuit held this was not misappropriation because the banks dealt with Archegos at arm’s length, and that they had no obligation to act in Archegos’ interest. Where there was no agreement or special relationship, it was held that mere possession of client information did not create liability. In other words, the current US framework treats information like a piece of property: only if that information is “stolen” from a fiduciary does trading on it become unlawful. 

This rigid formalism conflicts with the principal of market fairness, and the very basis of financial regulation. Many outsiders such as hedge funds, credit analysts, or indeed prime brokers may routinely learn non-public data but owe no fiduciary duty. This is akin to a case where there would be no penalty if one pays a fee for confidential information, receives that information, but ultimately owes no duty to the source of that information. In practice this means that investors who profit from the kind of “shadow trading” alleged in Archegos face no sanction unless a statutory or contractual confidentiality duty can be shoehorned into the scenario. 

The Case for Fairness as a Regulatory Principle 

Putting fiduciary form over market reality undermines confidence in securities markets. Regulators globally recognize that fair, efficient, and transparent markets are a policy goal. For example, the International Organization of Securities Commissions (IOSCO) lists “ensuring that markets are fair, efficient and transparent” and “reducing systemic risk” among the core objectives of securities regulation. Investors are more likely to participate and provide liquidity when they believe the rules prevent egregious informational advantages. By contrast, if market actors believe that well-placed institutions can “legally” exploit non-public knowledge to the detriment of others, trust erodes. 

U.S. insider-trading law has traditionally focused on punishing deceit or theft of information, not on promoting a normative fairness. But fairness, in the sense of levelling the informational playing field, is itself critical to market stability. When the public sees headlines of banks off-loading shares minutes before news breaks, they may rightly wonder whether only the insiders are protected by law. This “lost confidence” dynamic, though hard to quantify, can impair market liquidity and even precipitate further crashes, defeating the broader objectives of securities law. 

It is important to note that in major jurisdictions such as the EU and UK, insider trading law is possession-based, where any person who trades on material non-public information commits a violation, regardless of fiduciary duty. This broad fairness norm contrasts sharply with U.S. law, where liability hinges on a breach of trust. Under the UK/EU model, the Archegos banks’ actions would likely qualify as market abuse, while U.S. courts found no basis for liability. 

Integrating Fairness into U.S. Insider Trading Law 

The Archegos case illustrates that a purely formal “theft” paradigm can let risky insider-like trading go unpunished, with the attendant risk to market integrity. To remedy this, lawmakers and regulators should consider reforms, as part of prudential regulation and general policy, that place fairness on equal footing with property rules. Possible reforms include: 

Firstly, the definition of an “insider” could be broadened to capture parties who obtain material non-public information by virtue of their market role. Prime brokers, swap counterparties, and large clearing firms often see concentrated client positions before the public. The law could treat such entities as insiders for the purposes of those securities, recognizing their informational advantage. 

Secondly, regulators could require greater transparency around positions and information flows that threaten system stability. For example, prime brokers might have to report large off-exchange derivative positions to regulators, or notify exchanges when they intend to liquidate blocks triggered by client distress. Requiring public disclosure or regulatory pre-clearance of unusual concentration build-ups reduce the surprise element of a collapse.  

More broadly, regulatory reform could target entities that hold a systemic informational advantage. This includes situations where a firm has advance knowledge of a client’s impending collapse. In such cases, the law could impose affirmative duties to safeguard market fairness. Those duties may take two forms: abstaining from trading, or disclosing enough information to ensure that all market participants are placed on comparable footing. 

Such reforms would need careful calibration to avoid chilling legitimate trading. But they would align U.S. law more closely with its stated goals. Regulators should ensure that markets are fair, efficient and transparent and without any systemic risk. A fairness-based insider-trading regime that removes the requirement of a fiduciary breach would better advance these objectives. It would also resonate with emerging legislative momentum, exemplified by proposals to increase SEC oversight over family offices, which seek to close informational loopholes exposed by the Archegos collapse.  

Conclusion 

The Archegos collapse and the ensuing litigation are a strong reminder that the current insider-trading doctrine in the U.S. is ill-equipped to deal with sophisticated market abuses absent a formal duty to disclose. Confined to instances of “stealing” information from a duty-holder, U.S. law effectively blessed a state of affairs in which the uninformed investors incurred massive losses while counter-parties with privileged knowledge escaped liability. Restoring fairness and confidence requires regulatory reform that recognizes the presence of such risks and extends the insider-trading framework to encompass trading on systemic informational advantages, even absent any traditional fiduciary relationship. In the absence of such reform, the law leaves investors and financial stability exposed to serious systemic vulnerabilities. This makes the Archegos episode more than an anomaly in doctrine; it is a systemic alarm, pressing for an insider-trading doctrine that prioritizes market fairness over formalism.