Bill Hwang, founder of collapsed family office Archegos Capital Management, has been arrested by US authorities and charged with racketeering, fraud and market manipulation.
The indictment, released Wednesday, accused Hwang, 58, and former CFO Patrick Halligan, 45, of using Archegos as an “instrument of market manipulation and fraud” with “far-reaching consequences for other participants in the United States securities markets.”
The case, brought by federal prosecutors in Manhattan, marks the first criminal charge against Hwang, one of the so-called Tiger Cub veterans of Julian Robertson’s Tiger Management Fund, whose little-known investment vehicle rocked some of Wall Street’s biggest financial institutions when it imploded a year ago.
“The scale of the trade was overwhelming,” said Damian Williams, US Attorney for the Southern District of New York.
While Archegos was a relatively obscure family office, it managed to attract many large lenders. Archegos’ capital grew from $1.5 billion in March 2020 to $35 billion a year later, with the group’s positions growing as high as $160 billion.
The collapse of Archegos caused billions of dollars in losses for investment banks including Credit Suisse, UBS, Nomura and Morgan Stanley after they defaulted on margin calls, with more than $100 billion wiped from the valuations of nearly a dozen companies as the positions were dissolved by Archegos.
The group used borrowed money from banks like Morgan Stanley and Credit Suisse to build multibillion-dollar positions in US-listed companies like ViacomCBS — now known as Paramount — and online retailers Shopify and Farfetch. By using derivatives, where the bank bought or sold shares on behalf of Archegos, the company left no visible footprint of its operations to the investing public.
“This program was historic in scope,” Williams said. “The lies fed them [stock price] Inflation and inflation fed more lies. It went round and round. But last year the music stopped, the bubble burst, prices fell, and when they did billions of dollars evaporated almost overnight.”
Hwang and Halligan pleaded not guilty during a hearing in federal court in Manhattan.
Hwang, dressed dapperly in a green turtleneck sweater, agreed to underwrite a $100 million bond backed by $5 million in cash and an interest in two properties, including his home.
The former hedge fund manager agreed to travel restrictions that limited his movements to New Jersey, Connecticut and parts of New York. He said he lost his passport and vowed not to apply for a new one, a government lawyer told the court.
A lawyer for Hwang said Wednesday the investor was “completely innocent of any wrongdoing” and that the allegations were “exaggerated.”
“We are extremely disappointed that the US Attorney’s Office has found it appropriate to indict a case that has absolutely no basis in fact or law; This type of prosecution for open market transactions is unprecedented and threatens all investors,” said Lawrence Lustberg, attorney for Hwang.
A lawyer for Halligan said he was innocent and “is exonerated.”
Scott Becker, who was Archegos’ director of risk management, and William Tomita, the family office’s chief trader, were also charged over their roles in the alleged conspiracy. They have pleaded guilty and are cooperating with the US government, according to the Justice Department.
The Securities and Exchange Commission filed parallel civil lawsuits against Archegos and Hwang on Wednesday morning. It states that Archegos’ derivatives and equity positions in ViacomCBS accounted for more than half of the company’s freely tradable shares as of March 2021.
The SEC said that in June 2020, when asked by a colleague if the relative resilience of ViacomCBS stock was “a sign of strength,” Hwang texted, “No. It’s a sign that I’m buying.” He added the emoji for tears of joy or laughter, the SEC noted.
The Commodity Futures Trading Commission also filed civil fraud charges against Archegos and Halligan.
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Prosecutors allege that Hwang and Halligan engaged in two connected criminal activities. They accused Archegos of obscuring his trades and positions in such a way that his counterparties and other traders in the market believed “the prices of these stocks are the product of natural forces of supply and demand, when in fact they are the artificial product of Hwang’s manipulative trading.” was “.
The indictment also alleges that the defendants misrepresented the group’s investment plans and holdings when Archegos borrowed billions of dollars from major Wall Street lenders to shore up its businesses.
While those banks were aware that Archegos was running a relatively small number of trades, prosecutors said they were misinformed about the magnitude of those trades and were reassured by the family office that Archegos could exit its trades in just two weeks.
But that was not the case. Last year, the group’s position in ViacomCBS exceeded $20 billion, and trading with the media company accounted for more than 10 percent of daily activity at the stock. Prosecutors found that it would have taken Archegos more than three months to sell ViacomCBS stock without significantly moving the price.
According to prosecutors, Hwang also at times coordinated deals with a former unnamed colleague who runs a hedge fund. When Archegos attempted to increase its position in GSX Techedu in 2021, it was constrained by one of its prime brokers, which refused to take a major stake in the US-listed Chinese education company. This limit restricted its ability to enter into new swap contracts on GSX with any of its clients.
Hwang knew, according to the indictment, that the former colleague, who is described as a “close friend,” held a similar position at GSX Techedu at the same bank. Prosecutors allege that he “causes” that person to transfer his position to another bank, which gave Archegos an opportunity to expand his position in GSX.
Archegos’ demise has prompted new regulations from SEC regulators pushing to overhaul disclosures for wholesale investors.
Additional reporting by Mark Vandevelde in New York