Morgan Stanley, Goldman, Wells Fargo to settle Archegos trades lawsuit

ViacomCBS Inc. investors who sued Morgan Stanley, Goldman Sachs Group Inc. and Wells Fargo & Co. for dumping the media company’s shares amid the collapse of Archegos Capital Management asked a judge for final approval of a $120 million settlement with the banks.

The trio were among the prime brokers that helped Archegos, Bill Hwang’s $36 billion family office, place massive bets on stocks. They also acted as underwriters for Viacom, now known as Paramount Global, in a March 2021 secondary offering. The company was one of Hwang’s biggest swap positions, and a tepid response to the offering led to a meltdown that eventually wiped out his firm.

The investors, led by Frank Capital Partners, sued months after Archegos’ collapse, claiming the banks failed to disclose conflicts of interest in their dealings with both Hwang and Viacom. Lawyers for the shareholders asked a New York state judge on July 1 to approve a deal with the banks reached earlier this year. A hearing was scheduled for Aug. 5.

As part of the proposed settlement, the banks continue to deny wrongdoing but say they want to avoid the distraction and expense of continued litigation. Spokespeople for Morgan Stanley, Goldman and Wells Fargo declined to comment, as did a lawyer for the shareholders.

The parties agreed not to disclose how much each bank will pay. 

According to Securities and Exchange Commission filings, Morgan Stanley was the lead underwriter, accounting for almost 45% of the Viacom offering. Goldman had 3.2% and Wells Fargo less than 2%.

The investors initially sued dozens of banks, brokerages and individuals claiming fraud on a class of Viacom shareholders who lost money. The other defendants were dismissed and the case focused on Morgan Stanley, Goldman and Wells Fargo.

Hwang and the firm’s former chief financial officer, Patrick Halligan, were both convicted last year of defrauding their bank counterparties. The pair were found to have misled the banks into providing them with billions of dollars in trading capacity, which Hwang then used to artificially inflate the prices of a highly concentrated group of stocks, including Viacom.

When Archegos collapsed, its trading partners lost nearly $10 billion. The losses contributed to the demise of one of the biggest names in finance, Credit Suisse Group AG, and caused significant losses at Morgan Stanley, UBS Group AG, Nomura Holdings and others.

Hwang was sentenced to 18 years in prison and Halligan eight. Both remain free on bail while they appeal their convictions.

In their suit against the bank, the Viacom investors received more than 1.5 million pages of documents from the banks and took testimony from 37 witnesses. Both sides eventually hired Layn Phillips, a former federal judge, to mediate the case. Phillips recommended the $120 million price tag to which both sides agreed. 

The case is Camelot Event Driven Fund v. Morgan Stanley & Co., No. 654959/2021, New York State Supreme Court, New York Co. (Manhattan).

© Bloomberg