Archegos Capital Management founder
Bill Hwang
and Chief Financial Officer
Patrick Halligan
had been indicted on securities fraud and racketeering expenses Wednesday for what prosecutors mentioned was a large fraud and manipulation scheme that just about jeopardized the U.S. monetary system.
Archegos collapsed in March 2021 in probably the most dramatic meltdowns on Wall Street in many years, leaving banks with greater than $10 billion in losses and sparking requires extra regulatory oversight. More than $100 billion in inventory market worth vanished in a matter of days.
Manhattan U.S. Attorney
Damian Williams
described the scheme as historic in scope, alleging the defendants and their co-conspirators lied to banks to acquire billions of {dollars} in loans, which they then used to inflate the inventory costs of publicly traded corporations.
“The lies fed the inflation and the inflation fed more lies,” Mr. Williams mentioned at a information convention. “Last year, the music stopped. The bubble burst. The prices dropped. And when they did, billions of dollars evaporated overnight.”
Messrs. Hwang and Halligan, who had been arrested Wednesday morning, face securities fraud, wire fraud, racketeering conspiracy and different expenses.
Losses at Archegos Capital Management triggered the liquidation of positions approaching $30 billion in worth, The Wall Street Journal has reported, and despatched the shares of two main funding banks tumbling.
Who is Bill Hwang?
Mr. Hwang is a former protégé of hedge-fund titan
Julian Robertson,
who based Tiger Management in 1980 and turned an preliminary $8.8 million funding from household and buddies into almost $22 billion earlier than stepping again nearly twenty years later. Quite a few traders skilled by Mr. Robertson who went on to begin their very own hedge-fund corporations grew to become recognized on Wall Street because the “Tiger cubs.”
Mr. Hwang is Christian and has spoken about his religion publicly. In an interview posted on YouTube in 2018, he mentioned considered one of his targets was “trying to be a great investor.” He additionally mentioned he was investing in corporations that had been benefiting society.
He recalled being a giant investor in LinkedIn, which he described as serving to individuals understand their job potential. “Do I think God loves it? Of course!” he mentioned. “I’m like a little child looking for what can I do today, where can I invest, to please our God?”
Mr. Hwang, who’s believed to be in his late 50s, emigrated to the U.S. after his senior yr of highschool in South Korea. He attended UCLA and later acquired an MBA from Carnegie Mellon University. His father, a pastor, died on the age of fifty, in line with a 2018 interview with Mr. Hwang within the South Korean Kukmin Ilbo newspaper.
The billionaire mentioned within the interview that his enterprise calamities a decade in the past revived his curiosity in Christianity and that he makes use of his basis to sponsor church buildings within the U.S. and South Korea. Tax paperwork for the muse present that it has supported quite a lot of Christian, Korean and Asian-American causes in recent times.
“I’m decreasing the amount of money under my name, in order to do things that God loves,” he mentioned within the 2018 interview. “I do it because I like God more than I like money.”
How a lot cash did Archegos have below administration?
Mr. Hwang managed round $10 billion of household cash by way of Archegos. The agency made huge bets on public shares within the U.S., Europe and Asia. Unwinding of his positions triggered sharp falls final week in lots of shares, together with ViacomCBS Inc. and Discovery Inc., at the same time as broader markets rose.
What was Mr. Hwang’s affiliation with Tiger Asia?
Mr. Hwang based Tiger Asia Management LLC in 2001 with help from Mr. Robertson. The agency was primarily based in New York and went on to develop into one of many largest Asia-focused hedge funds, operating greater than $5 billion at its peak. In 2008, it was considered one of a swath of funds that suffered losses associated to the hovering share value of Germany’s
Volkswagen AG
.
Was Mr. Hwang concerned in earlier securities violations?
In the summer season of 2012, Tiger Asia mentioned it deliberate to wind down and return exterior capital to traders. Later that yr, the agency pleaded responsible to a prison fraud cost and agreed to pay $44 million to settle civil allegations by U.S. securities regulators that it engaged in insider buying and selling of Chinese financial institution shares.
“Tiger Asia regrets the actions for which it accepts responsibility today and is grateful that this matter is now resolved and behind it in the United States,” Mr. Hwang mentioned in an announcement on the time.
He turned Tiger Asia into his household workplace and renamed it Archegos, in line with its web site.
What are swaps and why did Archegos use them?
Archegos would purchase up shares till it approached the 5% possession threshold that triggers sure disclosure necessities, in line with the indictment. At that time, Mr. Hwang required Archegos to modify over to by-product contracts referred to as complete return swaps that allowed it to extend its publicity to these shares.
If a inventory went up, the financial institution promoting the swap would pay Archegos a corresponding quantity reflecting the inventory’s enhance. If the value fell, Archegos would pay the financial institution. The financial institution would earn a price for its service. To keep away from market threat, the financial institution would purchase the underlying inventory and easily pay out the features on the shares to Archegos. As Archegos purchased extra swaps, the banks purchased extra shares, pushing up costs.
(These transactions transfer in the wrong way if the client of the swaps makes a guess that the inventory will fall.)
The use of swaps allowed Mr. Hwang to take care of his anonymity regardless of having publicity to shares effectively in extra of the disclosure thresholds. Prosecutors say Mr. Hwang used this technique to govern the costs of shares in his portfolio.
Swaps are widespread and have been round for a very long time. They are additionally controversial. Long Term Capital Management, a hedge fund suggested by two Nobel laureates that just about introduced down Wall Street within the late Nineties, used swaps.
Warren Buffett
wrote in regards to the dangers of swaps in his 2003 letter to traders.
How total-return swaps work
A complete return swap permits an investor, reminiscent of a hedge fund, to spend money on belongings with out proudly owning them. In the deal, the fund makes funds to an funding financial institution primarily based on charges and an rate of interest reminiscent of Libor.
If the underlying belongings falter, the hedge fund should pay the financial institution an quantity primarily based on the unfavourable returns plus the common charges it has agreed to pay.
The funding financial institution buys belongings, reminiscent of a basket of shares, and makes funds to the hedge fund primarily based on the whole return of the belongings.
With closely
leveraged positions, the financial institution might make
a margin name,
requiring a consumer to place up extra collateral. If the consumer fails to conform, the financial institution might promote the belongings, triggering extra declines in value.
The financial institution owns the belongings, not the hedge fund. So whereas a hedge fund might have heavy publicity to a inventory by way of swaps with a number of banks, it isn’t topic to disclosure legal guidelines {that a} very massive shareholder can be.
How total-return swaps work
A complete return swap permits an investor, reminiscent of a hedge fund, to spend money on belongings with out proudly owning them. In the deal, the fund makes funds to an funding financial institution primarily based on charges and an rate of interest reminiscent of Libor.
If the underlying belongings falter, the hedge fund should pay the financial institution an quantity primarily based on the unfavourable returns plus the common charges it has agreed to pay.
The funding financial institution buys belongings, reminiscent of a basket of shares, and makes funds to the hedge fund primarily based on the whole return of the belongings.
With closely
leveraged positions, the financial institution might make
a margin name,
requiring a consumer to place up extra collateral. If the consumer fails to conform, the financial institution might promote the belongings, triggering extra declines in value.
The financial institution owns the belongings, not the hedge fund. So whereas a hedge fund might have heavy publicity to a inventory by way of swaps with a number of banks, it isn’t topic to disclosure legal guidelines {that a} very massive shareholder can be.
How total-return swaps work
A complete return swap permits an investor, reminiscent of a hedge fund, to spend money on belongings with out proudly owning them. In the deal, the fund makes funds to an funding financial institution primarily based on charges and an rate of interest reminiscent of Libor.
If the underlying belongings falter, the hedge fund should pay the financial institution an quantity primarily based on the unfavourable returns plus the common charges it has agreed to pay.
The funding financial institution buys belongings, reminiscent of a basket of shares, and makes funds to the hedge fund primarily based on the whole return of the belongings.
With closely
leveraged positions, the financial institution might make
a margin name,
requiring a consumer to place up extra collateral. If the consumer fails to conform, the financial institution might promote the belongings, triggering extra declines in value.
The financial institution owns the belongings, not the hedge fund. So whereas a hedge fund might have heavy publicity to a inventory by way of swaps with a number of banks, it isn’t topic to disclosure legal guidelines {that a} very massive shareholder can be.
How total-return swaps work
A complete return swap permits an investor, reminiscent of a hedge fund, to spend money on belongings with out proudly owning them. In the deal, the fund makes funds to an funding financial institution primarily based on charges and an rate of interest reminiscent of Libor.
The funding financial institution buys belongings, reminiscent of a basket of shares, and makes funds to the hedge fund primarily based on the whole return of the belongings.
The financial institution owns the belongings, not the hedge fund. So whereas a hedge fund might have heavy publicity to a inventory by way of swaps with a number of banks, it isn’t topic to disclosure legal guidelines {that a} very massive shareholder can be.
If the underlying belongings falter, the hedge fund should pay the financial institution an quantity primarily based on the unfavourable returns plus the common charges it has agreed to pay.
With closely leveraged positions, the financial institution might make a margin name, requiring a consumer to place up extra collateral. If the consumer fails to conform, the financial institution might promote the belongings, triggering extra declines in value.
Write to Juliet Chung at [email protected]
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