Thank you for the project provided. I was able to reproduce the described behavior.
The reason for the ArgumentException is adding the same diagram item twice in the GraphSource. However, in order to avoid that, when you create a subgroup you should remove the shapes from the parent container (group) and add them only in the new one, then add the nested container (subgroup) to the first one.
You can find a sample implementation of this approach in the attached project. In brief, I get the container of the business object (node) and then the containershape where this node is placed using ParentContainer
property. Then I change the ItemSource of the ContainerShape and instead of the separated items, which are selected, I add a new container with the same items inside.
I hope this sample will get you started. Please take a look at the project and see if it works for you.
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