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 unsealed on Wednesday accused Hwang, 58, and former chief financial officer 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 charges against Hwang, one of the so-called Tiger Cub veterans of Julian Robertson’s Tiger Management fund whose little-known investment vehicle rattled some of Wall Street’s biggest financial institutions when it imploded a year ago.
“The scale of the trading was stunning,” 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 big lenders. Archegos’s capital swelled from $1.5bn in March 2020 to $35bn a year later, with the group’s positions ballooning to as much as $160bn.
Archegos’s collapse caused billions of dollars of losses for investment banks including Credit Suisse, UBS, Nomura and Morgan Stanley after it defaulted on margin calls, with more than $100bn wiped from the valuations of nearly a dozen companies as Archegos’s positions were unwound.
The group used borrowed money from banks such as Morgan Stanley and Credit Suisse to amass multibillion-dollar positions in US-listed companies such as ViacomCBS — now known as Paramount — and online retailers Shopify and Farfetch. By using derivatives, where the bank it traded with bought or sold stocks on Archegos’s behalf, the firm left no visible footprint of its activity to the investing public.
“This scheme was historic in scope,” said Williams. “The lies fed the [stock price] inflation and the inflation fed more lies. Round and round it went. But last year the music stopped, the bubble burst, the prices dropped, and when they did billions of dollars nearly evaporated overnight.”
Hwang and Halligan pleaded not guilty during an arraignment hearing in Manhattan federal court.
Neatly dressed in a green polo neck sweater, Hwang agreed to sign a $100mn bond, which will be secured by $5mn in cash and an interest in two properties including his home.
The former hedge fund manager agreed to travel restrictions limiting his movements to New Jersey, Connecticut and parts of New York. He said he has lost his passport, and promised not to apply for a new one, a government lawyer told the court.
An attorney for Hwang said on Wednesday that the investor was “entirely innocent of any wrongdoing” and that the allegations were “overblown”.
“We are extremely disappointed that the US attorney’s office has seen fit to indict a case that has absolutely no factual or legal basis; a prosecution of this type, for open-market transactions, is unprecedented and threatens all investors,” said Lawrence Lustberg, Hwang’s counsel.
An attorney for Halligan said he was innocent and “will be exonerated”.
Scott Becker, who was director of risk management at Archegos, and William Tomita, the family office’s head trader, were also charged for their roles in the alleged conspiracy. They have pleaded guilty and are co-operating with the US government, according to the justice department.
The Securities and Exchange Commission brought a parallel civil case against Archegos and Hwang on Wednesday morning. It said that in March 2021 Archegos’s derivative and stock positions in ViacomCBS accounted for more than half of the company’s freely tradeable stock.
The SEC said that in June 2020, when asked by a colleague whether the relative resilience in ViacomCBS shares “was ‘a sign of strength’” on a day when the broader stock market tumbled, Hwang texted: “No. It is a sign of me buying.” He added the emoji for tears of joy or laughing, the SEC noted.
The Commodity Futures Trading Commission also filed civil fraud charges against Archegos and Halligan.
Prosecutors allege that Hwang and Halligan operated two interrelated criminal schemes. They charged that Archegos disguised its trading and positions so that its counterparties and other traders in the market believed “the prices of those stocks were the product of natural forces of supply and demand when, in truth, they were the artificial product of Hwang’s manipulative trading”.
The indictment also alleges that the defendants misrepresented the group’s investment plans and holdings as Archegos drew on billions of dollars of credit from big Wall Street lenders to prop up its trades.
While those banks knew that Archegos was betting on a relatively small number of trades, prosecutors said, they were misinformed about the scale of those trades, and had been assured 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 $20bn and its trading in the media company accounted for more than 10 per cent of the daily activity in the stock. Prosecutors noted that it would have taken Archegos more than three months to sell out of the ViacomCBS stock without significantly moving the price.
Hwang at times also co-ordinated trades with a former unnamed colleague who runs a hedge fund, according to prosecutors. When Archegos sought in 2021 to increase its position in GSX Techedu, it hit limits with one of its prime brokers who refused to buy a larger stake in the US-listed Chinese education company. That limit restricted its ability to enter new swaps contracts on GSX with any of its clients.
Hwang knew the former colleague, described as a “close friend”, had a similar position in GSX Techedu at the same bank, according to the indictment. Prosecutors allege he “caused” this person to move their position to another bank, giving Archegos the ability to increase its position in GSX.
The downfall of Archegos has prompted new rulemaking from regulators at the SEC, who are pushing to revamp disclosures for large investors.
Additional reporting by Mark Vandevelde in New York