Federal agents arrest owner

Firm accused of scam causing huge losses

NEW YORK » The sudden and stunning collapse of the once-obscure private investment firm Archegos Capital Management sent shock waves through the stock market last year and left Wall Street banks with $10 billion in losses almost overnight.

It also kick-started one of the highest-profile white-collar criminal investigations in years. On Wednesday, federal prosecutors and securities regulators laid out what they had found: a stock manipulation scheme they called staggering in its size and brazen in its execution.

Prosecutors said Bill Hwang, the firm’s owner, and his former chief financial officer had deliberately misled their banks to borrow money and place enormous bets on a handful of stocks through sophisticated securities. The trades were obfuscated by the loose regulations governing so-called family offices like Archegos, which wealthy individuals use to manage their investments.

When the risky strategy collapsed in just a few days in March 2021, $100 billion in shareholder value vanished, hitting the portfolios of investors who had invested when the unseen hand of Archegos was pushing those stocks to new heights.

“This scheme was historic in scope,” Damian Williams, U.S. attorney for the Southern District of New York. “The lies fed the inflation, and the inflation fed more lies,” he said. “Round and round it went. But last year, the music stopped.”

Hwang and his former top lieutenant, Patrick Halligan, were arrested at their homes Wednesday morning on charges of racketeering conspiracy, securities fraud and wire fraud. Both men were to be released on bond; Hwang’s $100 million bond was secured by $5 million in cash and two properties.

A 59-page indictment, filed in federal court in Manhattan, alleges the men and others at Archegos sometimes timed their trades to drum up the interest of other investors while borrowing money to make bigger and bigger bets. The heavy borrowing ballooned Hwang’s portfolio to $35 billion from $1.5 billion in a single year, prosecutors said, and the effective size of his firm’s stock positions swelled to $160 billion — rivaling some of the biggest hedge funds in the world.

But Archegos’ footprint in the market was all but invisible to regulators, investors and even the big Wall Street banks that had financed its trades. Family offices

that invest money of a small circle of insiders are lightly regulated. And it spread its bets across several banks using sophisticated financial instruments called swaps, which allowed Hwang to bet on the direction of stock prices without actually owning the shares.

The collapse of Archegos led to investigations by federal prosecutors, the Securities and Exchange Commission and other regulators. The SEC filed its own civil complaint Wednesday against Hwang, Halligan and two former traders at Archegos. The Commodity Futures Trading Commission also filed a civil complaint over the matter.

Until a few days ago, Hwang and his lawyers had thought they would be able to persuade federal authorities not to file criminal charges. But those efforts — which included several in-person meetings with prosecutors, one just this week — failed.

Lawrence Lustberg, an attorney for Hwang, said the indictment “has absolutely no factual or legal basis” and his client was “entirely innocent of any wrongdoing.” Lustberg called the allegations against his client “overblown.”

Mary Mulligan, an attorney for Halligan, said her client “is innocent and will be exonerated.”

The Archegos collapse has put a spotlight on large family offices, which can engage in just as much trading as hedge funds but operate with less regulatory oversight because they do not use the money of outside investors like pension funds, foundations and other wealthy individuals.

It also increased the scrutiny of the way that Hwang, who cut his teeth at the pioneering hedge fund Tiger Management, made his bets. Archegos bought complex securities called total return swaps from banks, which allowed it to quickly take on much larger positions than it could by buying the shares outright.

Making such deals across multiple lenders kept them unaware of the size of Hwang’s wagers. And because the banks effectively held the big blocks of stocks, Archegos and Hwang avoided having to disclose its large positions to regulators and other investors.

In its civil complaint, the SEC said the attempts by Hwang and his firm to mask their buying power posed a risk not only to the banks that extended them credit but also to other investors, who may have bought stocks like Viacomcbs, Discovery and the Chinese education company GSX Techedu at inflated prices.

Hwang knew that Archegos could affect markets simply through the exercise of its buying power, the complaint said. In June 2020, an Archegos employee asked Hwang if the rising price of Viacomcbs shares was a “sign of strength.” Hwang responded: “No. It is a sign of me buying,” followed by a laughing emoji.

Archegos made swaps deals with a number of banks including Credit Suisse, Nomura, Morgan Stanley and UBS, and prosecutors said Hwang, Halligan and others at the firm made “materially false and misleading statements” to conceal the extent of its bets.

The wagers quickly fell apart in March 2021, when sharp declines in a few stocks in Archegos’ portfolio led the banks to issue margin calls, demanding more money from Archegos to fund its bets. When Hwang could not pay, the banks sold off millions of shares that were backing the swaps and took control of collateral that Archegos had posted in exchange for its big borrowings.

The collapse led to billions in losses for a number of banks, but Credit Suisse incurred the most pain. It lost more than $5 billion, and the trading debacle led to a number of top-level management changes at the bank.

Over the past few months, federal authorities have demanded documents from the firm and banks and had meetings and interviews with a number of former employees at Archegos, including Hwang.

The indictment names two former Archegos employees, Scott Becker and William Tomita, as part of the scheme. Both have pleaded guilty and are cooperating with the federal prosecution, said Williams, who spoke next to a large graphic poster with the headline: “A cycle of lies and market manipulation.”

“They lied about how big Archegos’ investments had become, they lied about how much cash Archegos had in hand, they lied about the nature of the swaps that Archegos held,” Williams said. “And we allege that they told those lies for a reason: so that the banks would have no idea that Archegos was really up to a big market manipulation scheme.”

The SEC complaint said Becker, the former chief risk officer at Archegos, and Tomita, the firm’s former top trader, typically led discussions with the banks about the firm’s trading positions but that Hwang and Halligan directed and set the tone for those discussions.

Authorities said Becker and Tomita understood that if they were truthful with the banks about the amount of risk Archegos was taking on, the financial institutions would not keep arranging new derivatives trades for it. Attorneys for Becker and Tomita did not respond to requests for comment. The collapse of Archegos has spurred calls for more disclosure by large family offices to the SEC and greater transparency in the derivatives market so regulators can better gauge the kind of risk that traders and banks are taking on.

In a statement, Gary Gensler, the SEC chair, said the collapse of Archegos “underscores the importance of our ongoing work to update the security-based swaps market to enhance the investor protections.”