US prosecutors charged Archegos Capital Management founder Bill Hwang and Chief Financial Officer Patrick Halligan with fraud, in the latest fallout from the spectacular collapse of the family office.
Federal authorities said Hwang used Archegos as an “instrument of market manipulation and fraud,” causing billions of dollars in losses for banks, financial market investors and its own employees. Hwang was arrested by federal agents early Wednesday.
Hwang and Halligan were charged with 11 criminal counts, including racketeering conspiracy, market manipulation, wire fraud and securities fraud. The alleged crimes artificially inflated Archegos’s portfolio from US$1.5 billion ($2.06 billion) to US$35 billion in one year, according to a statement from Manhattan US Attorney Damian Williams.
Charging documents said Archegos’s market positions ballooned to US$160 billion at one point through a deceptive trading tactic that hid their true size from the market. The positions were inflated with the use of borrowed money and derivative securities that required no public reporting. When the market turned against the positions in March 2021, Hwang directed the fund’s traders to go on a buying spree in an attempt to prop up their price, federal prosecutors charged.
Archegos, Bill Hwang’s family office, imploded after amassing a concentrated portfolio of stocks by using borrowed money. It collapsed after some of the shares tumbled, triggering margin calls from banks, which then dumped Hwang’s holdings. Banks lost more than US$10 billion, prompting the departures of several senior executives and probes into the way firms monitor the risks run by their businesses serving hedge funds.
The US said the two men used Archegos to defraud market participants by “manipulating, controlling and artificially affecting the market for certain securities in Archegos’s portfolio,” according to the indictment. They also “repeatedly made materially false and misleading statements about Archegos’s portfolio of securities to numerous leading global investment banks and brokerages,” which encouraged them to trade with and extend credit to Archegos, the government said.
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Cash Purchases
In addition to Hwang and Halligan, the US named William Tomita and Scott Becker of Archegos as conspirators, though it did not charge them criminally.
Among the securities allegedly manipulated by Hwang were ViacomCBS, Discovery Communications Inc., Tencent Music Group, Texas Capital Bancshares Inc. and Rocket Companies Inc.
Prosecutors said Hwang typically invested through cash equity purchases until the size of his positions approached 5% of the outstanding shares of a company. Once it neared that threshold, he would then switch to a new method of trading to avoid public disclosure of his holdings. Using a trade known as a “total return swap,” he would then enter into contracts with banks that would pay out if share prices increased, but cost him if share prices went down.
Fortunes diverged among the firms that Archegos dealt with: Credit Suisse Group AG, Nomura Holdings Inc. and Morgan Stanley incurred some of the steepest losses. Others, including Goldman Sachs Group Inc., Wells Fargo & Co. and Deutsche Bank AG, escaped relatively unscathed.
