Bill Hwang, the enigmatic investor behind one of the most spectacular trade debacles in Wall Street history, was arrested Wednesday morning for what federal prosecutors characterized as a vast criminal scheme to cheat banks and manipulate markets. .
A year after the collapse of Hwang’s private investment firm, Archegos Capital Management, which shocked global finance, prosecutors have provided their first full account of what happened inside the firm, and new details about the scale of the business. Hwang’s operations and the origins of his strategy. .
Hwang was charged with fraud and Archegos CFO Patrick Halligan was also arrested and charged with fraud. If he is found guilty on all counts, Hwang faces up to 380 years in prison. Both men pleaded not guilty in a lower Manhattan court on Wednesday and were released on bond.
The collapse of Archegos, the Hwang family office that was virtually unknown even on Wall Street, exposed big loopholes in the way major banks manage their risks, as well as the way regulators oversee Wall Street. A year later, Credit Suisse AG, among others, is still dealing with the fallout. Hwang’s spectacular gains and losses extended to such well-known stocks as entertainment giant ViacomCBS Inc.
The two men were charged with 11 criminal charges, including racketeering conspiracy, market manipulation, wire fraud and securities fraud, according to an indictment unsealed Wednesday. The US Securities and Exchange Commission and the Commodity Futures Trading Commission also filed related civil complaints.
Some of the allegations made by prosecutors have been known since the Archegos implosion, such as Hwang’s use of swaps to keep the fund’s stock positions below 5% to prevent required disclosures from being triggered, and misleading banks about the composition of your portfolio and the specific stocks you bet on. .
But authorities on Wednesday revealed the extent of the fraud: Hwang allegedly inflated the value of his portfolio from $1.5 billion to more than $35 billion in a year, and raised the total size of Archegos’ market positions, including borrowed money, to a whopping $160 billion at its peak.
‘It’s not business as usual’
“The scale of the trade was impressive,” Damian Williams, US Attorney for the Southern District of New York, told reporters on Wednesday. “This was not business as usual or a sophisticated strategy, it was a fraud.”
The documents also reveal a change in Hwang’s investment process that began after his move to remote work with the Covid-19 pandemic, spending more time communicating with traders than analysts.
Prosecutors also allege that Hwang coordinated certain transactions with a close friend and former colleague at an unnamed hedge fund to maximize his impact on the market. The fund manager, identified only as “Advisor-1,” is Tao Li, a director at Teng Yue Partners, Bloomberg reported on Wednesday. Li, a Hwang acolyte, and Teng Yue have not been accused of wrongdoing, and the firm did not respond to messages seeking comment.
“Bill Hwang is completely innocent of any wrongdoing,” his attorney, Lawrence Lustberg, said in a statement. “There is no evidence whatsoever that he has committed any type of crime, much less the exaggerated accusations that permeate this indictment.” Lustberg said that Hwang had cooperated with investigations into Archegos.
The chief financial officer’s attorney, Mary Mulligan, said in a statement: “Pat Halligan is innocent and will be exonerated.”
With his graying hair slicked back and wearing a face mask, a green turtleneck and tan pants, Hwang appeared in court Wednesday afternoon to plead not guilty. He agreed to pay $5 million in cash and pledged two properties to secure a $100 million bond, while Halligan agreed to a $1 million bond. Both men agreed to restrict their travel.
The indictment says Archegos’ positions were inflated through the use of borrowed money and derivative securities that did not require 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 its price, federal prosecutors charged.
In addition to Hwang and Halligan, the US named William Tomita and Scott Becker, former top executives of Archegos, as co-conspirators. They have pleaded guilty and are cooperating with authorities. The men, who were named as defendants in the SEC lawsuit, also agreed to work with the CFTC and the SEC.
Speaking at a white-collar crime conference in New York on Wednesday morning, the US assistant attorney general on corporate crime and when it comes to corporate malfeasance.”
Archegos imploded after building up a concentrated portfolio of stocks using borrowed money. It tanked after some of the shares tumbled, prompting margin calls from banks, which then dumped Hwang’s holdings. Banks lost more than $10 billion, prompting the departure of several top executives and investigations into the way companies monitor risks to their businesses that serve hedge funds.
Fortunes diverged among the firms Archegos dealt with: Credit Suisse, 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, emerged relatively unscathed.
Prosecutors said Hwang and Halligan “repeatedly made materially false and misleading statements about Archegos’ securities portfolio to numerous leading global investment banks and broker-dealers,” which encouraged them to trade with and extend credit to Archegos, they said. government.
Authorities said Hwang knew Archegos could move the market.
In June 2020, when an Archegos analyst texted him if ViacomCBS’s stock price surge that day was “a sign of strength,” Hwang replied, “No. It’s a sign that I’m buying,” followed by a “tears of joy” emoji.
In addition to ViacomCBS, which has since changed its name to Paramount Global, the securities Hwang allegedly manipulated included Discovery Communications Inc., Tencent Music Group, Texas Capital Bancshares Inc. and Rocket Companies Inc.
The criminal conduct allegedly involved concealing and misleading counterparties about the actual size of positions, liquidity and concentration of the fund, by publicizing transactions with several different banks. When banks began asking the fund about the size of its positions, it generally stated that any single holding did not exceed 35% of its capital; in truth, prosecutors said, his holdings in Viacom at one point were equivalent to 96% of its capital.
It also involved buying shares simply to keep their price up, prosecutors charged.
The scheme began to unravel on March 23 last year, prosecutors said, the day Viacom announced a secondary share offering. The shares began to decline in anticipation of more shares coming to market; Viacom was such a key stake for Archegos that Hwang tried to defend the price by engaging in “an extraordinary number of transactions” in an effort to dominate the market. Although Halligan questioned the strategy, Hwang told his dealers to “just keep working on the orders,” according to the indictment. The effort failed.
Prosecutors said Hwang typically invested through cash capital purchases until the size of his positions approached 5% of a company’s outstanding shares. Once he got close to that threshold, he would switch to a new trading method to avoid public disclosure of his holdings.
Using a so-called “total return swap,” it would then sign contracts with banks that would pay if share prices rose, but impose costs if they fell. In some cases, his positions amounted to more than 50% of the outstanding shares of the companies in which he invested, according to the indictment.
“They lied a lot,” US Attorney Williams said Wednesday. “They lied about how large Archegos’ investments had become, they lied about the amount of cash Archegos had on hand, they lied about the nature of the shares Archegos owned. 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.”