Archegos seeks dismissal of CFTC complaint
Archegos Capital Management, LP is seeking to dismiss the complaint of the Commodity Futures Trading Commission (CFTC) against it.
Let’s recall that, according to the complaint, over the course of a year, Archegos Capital Management, LP and Patrick Halligan allegedly engaged in a fraudulent scheme to mislead swap counterpartiesof Archegos Fund, LP regarding the risk of Archegos Fund’s portfolio. The goal of the scheme was to convince the Swap Counterparties to repeatedly allow Archegos Fund to expand its highly leveraged swap positions in a concentrated handful of illiquid securities.
To accomplish this goal, Archegos made a series of misrepresentations to its Swap Counterparties regarding the size and concentration of its largest long positions, amount of unencumbered cash, and liquidity. And, in order to induce the Swap Counterparties to continue to allow Archegos’ expansion, it purchased large volumes of Broad-Based Security Index Swaps.
During the week of March 22, 2021, Defendants’ scheme collapsed. The value of several of Archegos Fund’s core long positions declined, triggering $13 billion in margin calls that Archegos Fund did not have sufficient capital to meet. As a result, Swap Counterparties lost over $10 billion.
On February 6, 2023, Archegos filed a reply to the CFTC arguments. Archegos claims that it has demonstrated that the swaps over which the CFTC claims jurisdiction – the Custom Basket Swaps and the ETF Swaps– are under the exclusive jurisdiction of the SEC. It further demonstrated that the Amended Complaint fails to allege facts supporting the claim that any alleged misrepresentations were made “in connection with” the ETF/Basket Swaps, a necessary predicate for any Commodity Exchange Act (CEA) claim.
Archegos argues that the CFTC is asking the Court to ignore documents that define the very swap transactions on which the Amended Complaint is based. Those documents, which are proper for the Court to consider on this motion, establish that the CFTC has no jurisdiction to bring these claims.
The CFTC next argues that the Custom Basket Swaps are within its purview. Archegos says that this means disregarding the plain language of the SEC’s and CFTC’s Joint Rules Release setting forth which agency has jurisdiction over which types of swaps, as well as the plain language of Archegos’ swap agreements with its counterparties.
The Swap Agreements are clear that Archegos and/or its counterparties had the discretionary authority to modify the Custom Basket Swaps, and therefore pursuant to the Joint Rules Release the CFTC has no jurisdiction to make claims concerning those Custom Basket Swaps.
Further, Archegos argues that the CFTC’s assertion of jurisdiction over the ETF Swaps lacks legal support.
First, the CFTC argues that because there is “no material economic difference” between the ETF Swaps and swaps over which it does have jurisdiction, the Court should allow its claims. There is no authority, however, in the Joint Rules Release or the CEA for such a “no material economic difference” test.
Second, the CFTC claims that the ETF Swaps are “mixed swaps,” subject to the joint jurisdiction of the CFTC and SEC. Archegos says that the Amended Complaint contains no such allegation or facts to support it, and here again, the Joint Rules Release forecloses that conclusion.
Finally, Archegos notes that the CFTC has no adequate response to its argument that alleged misrepresentations about the characteristics of Archegos’ portfolio, purportedly made to obtain additional trading capacity and more favorable margin rates, were not “in connection with” the ETF/Basket Swaps (positions Archegos primarily entered into for hedging purposes).
The CFTC relies on stale law, and alternatively contends its allegations are sufficient because the broader jurisdictional language of the CEA only requires the CFTC to allege facts that show a fraud was “in connection with any swap” rather than in connection with a purchase or sale of a swap. But Archegos says that this does not cure the CFTC’s pleading problem because the misrepresentations alleged here have no relationship to the ETF/Basket Swaps, even under a broad reading of the applicable standard.
Accordingly, Archegos says, all of the CFTC’s claims should be dismissed, with prejudice.