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,” said Damian Williams, U.S. attorney for the Southern District of New York. “The lies fed the inflation, and the inflation fed more lies. Round and round it went. But last year, the music stopped.”
Mr. Hwang and his former top lieutenant, Patrick Halligan, were arrested at their homes on Wednesday morning on charges of racketeering conspiracy, securities fraud and wire fraud. Lawyers for both men entered not guilty pleas during their arraignment.
Mr. Hwang, who appeared in court with chin-length salt-and-pepper hair swept behind his ears, was released on a $100 million bond, secured by $5 million in cash and two properties. Mr. Halligan, in a blue shirt and khakis, was freed on a $1 million bond.
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 Mr. 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’s 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 Mr. 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 S.E.C. filed its own civil complaint on Wednesday against Mr. Hwang, Mr. 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, Mr. 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, a lawyer for Mr. Hwang, said that the indictment “has absolutely no factual or legal basis” and that his client was “entirely innocent of any wrongdoing.” Mr. Lustberg called the allegations against his client “overblown.”
Mary Mulligan, a lawyer for Mr. 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 Mr. 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 Mr. Hwang’s wagers. And because the banks effectively held the big blocks of stocks, Archegos and Mr. Hwang avoided having to disclose its large positions to regulators and other investors.
In its civil complaint, the S.E.C. said the attempts by Mr. 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.
Mr. 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 Mr. Hwang if the rising price of ViacomCBS shares was a “sign of strength.” Mr. 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 Mr. Hwang, Mr. Halligan and others at the firm had made “materially false and misleading statements” to conceal the extent of its bets.
The wagers quickly fell apart in March last year when sharp declines in a few stocks in Archegos’s portfolio led the banks to issue margin calls, demanding more money from Archegos to fund its bets. When Mr. 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 Mr. 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 Mr. 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’s investments had become; they lied about how much cash Archegos had on hand; they lied about the nature of the stocks that Archegos held,” Mr. 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 S.E.C. complaint said that Mr. Becker, the former chief risk officer at Archegos, and Mr. Tomita, the firm’s former top trader, had typically led discussions with the banks about the firm’s trading positions but that Mr. Hwang and Mr. Halligan had directed and set the tone for those discussions.
Authorities said Mr. Becker and Mr. Tomita had understood that if they were truthful with the banks about the amount of risk that Archegos was taking on, the financial institutions would not keep arranging new derivatives trades for it. Lawyers for Mr. Becker and Mr. Tomita did not respond to requests for comment.
The collapse of Archegos has spurred calls for more disclosure by large family offices to the S.EC. 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 S.E.C. chairman, said the collapse of Archegos “underscores the importance of our ongoing work to update the security-based swaps market to enhance the investor protections.”
This is the second time Mr. Hwang has run into trouble with regulators. In 2012, he reached a civil settlement with U.S. securities regulators in an insider-trading investigation involving his former hedge fund and was fined $44 million. Mr. Hwang was barred from managing public money for at least five years but was still able to invest his own fortune. Regulators formally lifted the restriction in 2020.
Mr. Hwang, however, largely fell out of sight after the 2012 settlement. Archegos wasn’t particularly well known, even though it employed dozens at its peak. Some employees also worked for a large charitable foundation Mr. Hwang established — the Grace and Mercy Foundation — that gave to many religious causes.
Erik Gordon, a law and business professor at the University of Michigan, said it was time that large family offices be treated like all other investment advisers and subject to S.E.C. oversight, audits and inspections.
“If Archegos doesn’t lead to bringing large family offices into investment adviser act regulation, nothing will, short of a Martian invasion,” Mr. Gordon said.
April 27, 2022
A previous version of this article misstated Credit Suisse’s loss. It was $5 billion, not $5 million.