NEW YORK, April 4 (Reuters) - A New York state appeals

court said former ViacomCBS investors may sue Goldman Sachs ( GS )

, Morgan Stanley ( MS ) and other banks that underwrote

two stock offerings for the media company, upholding a ruling

that banks fear could upend capital markets.

Thursday's decision by the Appellate Division in Manhattan

came one week after a federal judge dismissed a lawsuit against

Goldman and Morgan Stanley ( MS ) by investors in ViacomCBS and other

stocks once held by Bill Hwang's Archegos Capital Management.

Investors said the banks hid their role as counterparties in

total return swaps for Archegos, and dumped their shares to

avoid losses in March 2021 as Archegos, with about $20 billion

of ViacomCBS exposure, missed margin calls and swiftly imploded.

Goldman and Morgan Stanley ( MS ), which were two of Archegos'

prime brokers, said banks already followed a slew of procedures

to avert conflicts of interest, protect client confidences and

prevent insider trading.

They said the "sweeping expansion" of disclosures ordered by

a trial judge last year would "pull the rug out" from under

countless banks, including by requiring them to predict how

their stock holdings would affect markets.

But the five-judge appeals court said ViacomCBS' banks had a

duty to disclose transactions that "affect" the stock price, and

that saying in offering documents they "may" conduct such

transactions could be misleading if they were already planned.

The court also said the banks wouldn't have to reveal

confidential information about clients, and could have simply

disclosed their intent to sell ViacomCBS shares without

mentioning Archegos.

Kannon Shanmugam, a lawyer who argued the appeal for Goldman

and Morgan Stanley ( MS ), declined to comment.

The lawsuit concerned offerings of ViacomCBS common and

preferred stock in March 2021.

Investors were led by the Camelot Event Driven Fund and the

Municipal Police Employees' Retirement System of Baton Rouge,

Louisiana. Their lawyers did not immediately respond to requests

for comment.

Thursday's decision largely upheld a February 2023 ruling by

Justice Andrew Borrok of the state Supreme Court in Manhattan.

In the federal ruling, U.S. District Judge Jed Rakoff said

investors in Archegos' stocks did not adequately allege that

Goldman and Morgan Stanley ( MS ) conducted insider trading, or

breached any fiduciary duty to the individual companies.

Hwang and former Archegos Chief Financial Officer Patrick

Halligan face a scheduled May 8 criminal trial in Manhattan over

their roles in Archegos' collapse.

The case is Camelot Event Driven Fund et al v Morgan Stanley ( MS )

& Co et al, New York State Supreme Court, Appellate Division,

1st Department, No. 2023-00983.