Archegos seeks to dismiss CFTC complaint
About two months after the Commodity Futures Trading Commission (CFTC) announced its action against Archegos Capital Management, LP, the company has responded to the allegations against it.
On July 1, 2022, Archegos filed a motion to dismiss the CFTC complaint in the New York Southern District Court. The document, seen by FX News Group, seeks to nix the CFTC Complaint with prejudice.
According to Archegos, the Complaint should be dismissed because it fails to state a claim over which the CFTC has jurisdiction.
Archegos invested in the securities markets by purchasing equity shares and total return swaps. Swaps are derivative securities that provided Archegos with economic exposure to the equity shares referenced by the swaps, but no actual ownership of the referenced equity shares. Archegos hedged those investments mostly through short positions in two products: (1) swaps that referenced broad-based indices known as exchange-traded funds (ETF); and (2) custom index basket swaps that, like the ETF swaps, provided Archegos economic exposure to a broad index of hundreds of different securities.
The company argues that the CFTC has the authority to regulate investments in broad-based index securities like the Index Basket Swaps, but jurisdiction over investments in regular shares or single-name total return swaps is reserved for the SEC, which has filed its own separate claims against Archegos arising out of the same time period as the CFTC’s action.
In its Complaint, the CFTC alleges that Archegos Capital Management employees violated the Commodity Exchange Act (CEA) by making misrepresentations to Archegos’ bank counterparties in an effort to obtain more favorable credit terms: better margin rates and additional trading capacity.
Archegos argues that the CFTC lacks jurisdiction to pursue these claims. Although the CFTC broadly asserts that the Index Basket Swaps were an “integral component” of the alleged fraud scheme, none of the alleged misrepresentations relate to the nature or value of any Index Basket Swaps traded between Archegos and its counterparties.
Instead, the alleged misrepresentations relate to the characteristics of Archegos’ portfolio or Archegos’ solvency during the week of March 22, 2021, and were made during discussions with counterparties that were evaluating the risk characteristics of that portfolio for the purpose of determining whether to extend credit. The Supreme Court and Second Circuit have made clear that fraud claims are outside the scope of the CEA unless they relate to the value of securities traded or consideration received in connection with those trades.
The company says that alleging that counterparties might have asked Archegos to “maintain appropriate levels” of the Index Basket Swaps had there been more transparency into Archegos’ portfolio does not equate to a claim that the counterparties were deceived about the value or nature of the Index Basket Swaps. The allegations boil down to an assertion that counterparties might have wanted Archegos to trade in more of the same derivatives it already had, not that the counterparties were deceived about the essence of those derivatives in any specific transaction with Archegos. These allegations are therefore insufficient to state a CEA claim, Archegos concludes.
Further, Archegos says that the CFTC cannot manufacture jurisdiction through allegations that Archegos’ counterparties “required” Archegos to enter into Index Basket Swaps trades. Describing the Index Basket Swaps as “required” does not transform the context and characteristics of the alleged misrepresentations into conduct that would fall within the scope of the CEA.
The company says the Complaint fails to allege sufficient facts to support the conclusory allegation that the Index Basket Swaps were “required”. Relying on excerpts from Bloomberg chats, the CFTC suggests that Archegos’ counterparties required Archegos to trade in the products over which it has jurisdiction. The only requirements, however, were that Archegos maintain certain long/short ratios in its portfolio – Archegos had the sole discretion to determine the particular products used to achieve that ratio.
Archegos notes that the CFTC does not cite to a single contract provision that requires that Archegos use Index Basket Swaps to hedge, and none of the communications quoted in the Complaint – when read in full – represent a demand by a counterparty that Archegos trade in those products.
Archegos concludes that because the CFTC has failed to adequately state a claim for fraud and failed to plead its purported fraud claim with particularity, the Court should dismiss all of the CFTC’s claims with prejudice.