NEW YORK (Reuters) -Goldman Sachs and Morgan Stanley defeated appeals by investors who said the banks' market manipulation and insider trading fueled the March 2021 collapse of Archegos Capital Management, the $36 billion family office run by the since-convicted Bill Hwang.

In a 3-0 decision on Tuesday, the 2nd U.S. Circuit Court of Appeals in Manhattan said Archegos was not an insider that owed fiduciary duties to companies whose stocks it owned.

This meant Archegos did not make Goldman and Morgan Stanley liable for allegedly front running the market by tipping them about its impending collapse, the court said.  

Goldman and Morgan Stanley were accused in seven lawsuits of using their knowledge of Archegos' illiquidity to dump billions of dollars of Hwang's favorite stocks including ViacomCBS, Discovery, and five Chinese companies such as Baidu.

Investors in those stocks said the Wall Street banks, which had been two of Archegos' prime brokers, should cover their losses because they knew Hwang could not meet margin calls and also had to sell.

Lawyers for the investors did not immediately respond to requests for comment. Goldman and Morgan Stanley declined to comment.

HWANG, FORMER ARCHEGOS CFO APPEALING CONVICTIONS

Archegos' collapse stemmed from Hwang's use of financial contracts known as total return swaps to build an estimated $160 billion of stock exposure.

The collapse also caused billions of dollars in losses for banks such as Credit Suisse, which was later bought by Swiss rival UBS, and Japan's Nomura Holdings.

Writing for the appeals court, Circuit Judge Maria Araujo Kahn also said Goldman and Morgan Stanley did not agree to act in Archegos' best interest, and found no proof they tipped preferred clients about its travails.

Hwang and former Archegos chief financial officer Patrick Halligan were convicted of fraud in July 2024, and later sentenced to 18 years and eight years in prison, respectively.

Both are appealing and free on bail. Hwang created Archegos in 2013, after his Tiger Asia funds settled a U.S. Securities and Exchange Commission insider trading case the prior December.

In July, Goldman, Morgan Stanley and Wells Fargo agreed to pay a combined $120 million to settle a lawsuit by former ViacomCBS shareholders who said the banks hid conflicts of interest.

Tuesday's decision upheld a March 2024 dismissal by U.S. District Judge Jed Rakoff in Manhattan.

The cases are In re Archegos 20A Litigation, 2nd U.S. Circuit Court of Appeals, Nos. 24-1159, 24-1161, 24-1162, 24-1166, 24-1173, 24-1177 and 24-1178.