Class Action Alleges Goldman Sachs, Morgan Stanley Avoided Billions in Losses Selling Vipshop Shares on Non-Public Info

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A proposed class action alleges Goldman Sachs and Morgan Stanley avoided billions in collective losses by selling shares in Vipshop Holdings Ltd. to “unsuspecting and unwitting” public shareholders after confidentially learning that a major asset management firm would soon have to fully liquidate its position in the Chinese online retailer. 

According to the 17-page securities case, Goldman Sachs and Morgan Stanley sold a large amount of Vipshop shares from March 22 through March 29, 2021 while in possession of “material, non-public information” pertaining to the failure, or likely failure, of Archegos Capital Management, a $10 billion family asset management office, to meet a margin call, which occurs when the value of securities in a brokerage account falls below a certain level and requires the account holder to deposit additional cash to meet margin requirements.  

The suit, citing subsequent media reports, says Goldman Sachs and Morgan Stanley unloaded large block trades consisting of shares of Archegos’ “doomed bets,” including billions’ worth of Vipshop securities, late on Thursday, March 25, before the Archegos story was public. This sent Vipshop’s stock into a “complete tailspin,” the case says. 

As a result of the share sales, the defendants avoided billions in combined losses, according to the complaint. Goldman Sachs and Morgan Stanley knew, or were reckless in not knowing, that they were prohibited from trading based on confidential, market-moving information, but traded anyway to the detriment of investors who were unable to sell their shares before Vipshop sales sunk, the suit alleges.

The lawsuit states that the founder and operator of Archegos Capital Management, Bill Hwang, a former portfolio manager at the Tiger Asia Management hedge fund, pleaded guilty to insider trading in 2021 and agreed to a $44 million Securities and Exchange Commission fine. Hwang launched the Archegos family office fund with $200 million in 2013, and by 2020, Archegos’ assets grew to $10 billion, the case says, noting ViacomCBS as among the properties in the firm’s portfolio. 

Central to the case are financial instruments called “total return swaps,” whereby underlying securities are held by banks that broker the investments. Per the filing, such swaps allow investors like Archegos to bet on how a stock price might move, “often with high levels of leverage,” without owning the underlying securities.

“Instead, banks buy and hold the stocks and give the fund a performance-related return,” the lawsuit states. “The fund secures the trades by giving the bank collateral, such as cash or equities.” 

Essentially, total return swaps allow investors to take huge positions while posting limited up-front funds, the suit continues. Investors, in essence, borrow from the bank, which allows them to maintain anonymity, the case says. The lawsuit claims these types of swaps were “particularly beneficial to Hwang” given investors who hold more than 10 percent of a company’s securities are deemed to be “company insiders” and thus subject to additional regulations concerning disclosures and profits. 

The complaint alleges that unbeknownst to investors and regulators, several large brokerage banks, including Goldman Sachs and Morgan Stanley, had simultaneously allowed Archegos to take on billions of dollars in exposure to volatile equities through swap contracts, which dramatically elevated the risk posed by these concentrated positions. According to the suit, Hwang’s swap strategy began to backfire in March 2021 as the stock price of companies in which Archegos had significant exposure began to drop from highs the month prior. 

The biggest blow came with regard to ViacomCBS, who announced on March 23 a new $3 billion offering to help fund investments in its Paramount+ streaming service, the lawsuit states. The complaint, citing reports after the fact, says this announcement “put significant stress on Archegos” as ViacomCBS’s share price slid after the announcement. 

The proposed class action goes on to state that in the wake of a report from influential Wall Street research firm MoffettNathanson that questioned ViacomCBS’s value, shares in the company “cratered,” dropping by more than half in value in less than a week. This was an issue for Archegos, who traded ViacomCBS on margin, the suit relays: 

“Because Archegos had to maintain a certain amount of collateral to satisfy its lenders, and since the value of ViacomCBS stock drastically declined, Archegos needed enough collateral to cover, or else a margin call (where the lender can force a sell-off of the stock to bring the investor back into compliance with margin requirements), could be triggered.

On March 27, 2021, it was reported that Archegos failed to cover and, as a result, had to liquidate more than $20 billion of its leveraged equity positions on Friday, March 26, 2021.” 

Whereas some financial institutions began to liquidate billions’ worth of shares that Archegos held swap positions on, Goldman Sachs and Morgan Stanley avoided the mountainous losses by selling roughly $5 billion in Archegos shares late Thursday, March 25, before news of the firm’s mass liquidation was public, according to the complaint. 

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