Archegos Capital Management founder
Bill Hwang
and its former chief monetary officer,
Patrick Halligan,
had been indicted on securities fraud and racketeering prices Wednesday in what prosecutors mentioned was an enormous fraud and manipulation scheme that almost jeopardized the U.S. monetary system.
Archegos collapsed in March 2021, 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.
Damian Williams,
U.S. lawyer for the Southern District of New York,
described the purported scheme as historic in scope, alleging that defendants and their co-conspirators lied to banks to acquire billions of {dollars} in loans, which they then used to inflate the inventory value 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 prices together with securities fraud, wire fraud and racketeering conspiracy. They pleaded not responsible in Manhattan federal courtroom Wednesday afternoon. A federal choose launched Mr. Hwang on a $100 million bond and Mr. Halligan on a $1 million bond.
Mr. Hwang’s lawyer Lawrence Lustberg mentioned in an announcement that his shopper is fully harmless and that there is no such thing as a proof in any respect that he dedicated any sort of crime.
“A prosecution of this type, for open-market transactions, is unprecedented and threatens all investors,” Mr. Lustberg mentioned. A lawyer for Mr. Halligan, Mary Mulligan, mentioned her shopper is harmless and will probably be exonerated.
Two different former Archegos workers,
William Tomita,
who was Archegos’s head dealer, and
Scott Becker,
who was its chief danger officer, have pleaded responsible for his or her roles within the alleged scheme and are cooperating with the federal government, prosecutors mentioned. Lawyers for each males didn’t reply to requests for remark.
At Archegos, Mr. Hwang constructed up large, concentrated positions in corporations and held some investments in a mixture of money and swaps, spinoff contracts struck with banks for a charge, with cash borrowed from banks throughout Wall Street. Mr. Hwang favored total-return swaps that gave Archegos the income and losses on the shares underlying the swap contracts whereas its lenders held the securities.
Mr. Hwang’s use of swaps allowed him to control the costs of shares in his portfolio as a result of the agreements prompted Wall Street corporations to purchase shares of the shares too, the indictment alleges. As the scale of Archegos’s swaps grew, so did the quantity of shares purchased by the Wall Street corporations, pushing up costs within the course of. Prosecutors additionally allege that Archegos traded at sure occasions of day and in different manipulative methods to prop up shares in its portfolio, together with to maintain share costs from falling an excessive amount of.
How total-return swaps work
A complete return swap permits an investor, corresponding to a hedge fund, to put money into property with out proudly owning them. In the deal, the fund makes funds to an funding financial institution based mostly on charges and an rate of interest corresponding to Libor.
If the underlying property falter, the hedge fund should pay the financial institution an quantity based mostly on the damaging returns plus the common charges it has agreed to pay.
The funding financial institution buys property, corresponding to a basket of shares, and makes funds to the hedge fund based mostly on the entire return of the property.
With closely
leveraged positions, the financial institution might make
a margin name,
requiring a shopper to place up extra collateral. If the shopper fails to conform, the financial institution might promote the property, triggering extra declines in value.
The financial institution owns the property, not the hedge fund. So whereas a hedge fund might have heavy publicity to a inventory by means of swaps with a number of banks, it isn’t topic to disclosure legal guidelines {that a} very giant shareholder could be.
How total-return swaps work
A complete return swap permits an investor, corresponding to a hedge fund, to put money into property with out proudly owning them. In the deal, the fund makes funds to an funding financial institution based mostly on charges and an rate of interest corresponding to Libor.
If the underlying property falter, the hedge fund should pay the financial institution an quantity based mostly on the damaging returns plus the common charges it has agreed to pay.
The funding financial institution buys property, corresponding to a basket of shares, and makes funds to the hedge fund based mostly on the entire return of the property.
With closely
leveraged positions, the financial institution might make
a margin name,
requiring a shopper to place up extra collateral. If the shopper fails to conform, the financial institution might promote the property, triggering extra declines in value.
The financial institution owns the property, not the hedge fund. So whereas a hedge fund might have heavy publicity to a inventory by means of swaps with a number of banks, it isn’t topic to disclosure legal guidelines {that a} very giant shareholder could be.
How total-return swaps work
A complete return swap permits an investor, corresponding to a hedge fund, to put money into property with out proudly owning them. In the deal, the fund makes funds to an funding financial institution based mostly on charges and an rate of interest corresponding to Libor.
If the underlying property falter, the hedge fund should pay the financial institution an quantity based mostly on the damaging returns plus the common charges it has agreed to pay.
The funding financial institution buys property, corresponding to a basket of shares, and makes funds to the hedge fund based mostly on the entire return of the property.
With closely
leveraged positions, the financial institution might make
a margin name,
requiring a shopper to place up extra collateral. If the shopper fails to conform, the financial institution might promote the property, triggering extra declines in value.
The financial institution owns the property, not the hedge fund. So whereas a hedge fund might have heavy publicity to a inventory by means of swaps with a number of banks, it isn’t topic to disclosure legal guidelines {that a} very giant shareholder could be.
How total-return swaps work
A complete return swap permits an investor, corresponding to a hedge fund, to put money into property with out proudly owning them. In the deal, the fund makes funds to an funding financial institution based mostly on charges and an rate of interest corresponding to Libor.
The funding financial institution buys property, corresponding to a basket of shares, and makes funds to the hedge fund based mostly on the entire return of the property.
The financial institution owns the property, not the hedge fund. So whereas a hedge fund might have heavy publicity to a inventory by means of swaps with a number of banks, it isn’t topic to disclosure legal guidelines {that a} very giant shareholder could be.
If the underlying property falter, the hedge fund should pay the financial institution an quantity based mostly on the damaging returns plus the common charges it has agreed to pay.
With closely leveraged positions, the financial institution might make a margin name, requiring a shopper to place up extra collateral. If the shopper fails to conform, the financial institution might promote the property, triggering extra declines in value.
Prosecutors alleged that Mr. Hwang averted publicly disclosing his positions to regulators and market contributors through the use of swaps reasonably than shopping for shares outright as his positions in corporations approached 5%, a degree above which public disclosure is required.
Mr. Hwang’s alleged fraud pumped Archegos’s portfolio from $1.5 billion to $35 billion in a single yr, ending in March 2021, and inflated its market dimension from $10 billion to $160 billion throughout that interval together with its borrowings from Wall Street corporations, in keeping with prosecutors.
The indictment attracts consideration to hidden stock-market dangers from giant spinoff transactions, corresponding to swaps, which allowed Archegos to manage secretly greater than 50% of shares of sure corporations final yr, together with ViacomCBS Inc., which is now generally known as
Paramount Global.
Archegos additionally repeatedly made up greater than 35% of the every day buying and selling quantity in a number of corporations, prosecutors mentioned.
The prices additionally level to unseen dangers posed by so-called household places of work—personal entities set as much as handle the fortunes of rich households—whose positions aren’t monitored by regulators. In latest years, many giant hedge funds have transformed to such household places of work.
The case marks the most important financial-crime prices to return out of the Southern District of New York underneath the management of Mr. Williams, who has pledged to root out corruption in monetary markets.
The Securities and Exchange Commission, in a separate civil-fraud grievance, sued Archegos, together with Messrs. Hwang, Halligan, Tomita and Becker. The Commodity Futures Trading Commission filed a civil grievance in opposition to Archegos and Mr. Halligan, and settled with Messrs. Tomita and Becker.
Criminal prices involving so referred to as “open market” inventory manipulations based mostly on trades which are professional—reasonably than phony or fraudulent trades—are uncommon and hark again to the times of the Eighties insider-trading scandal involving Ivan Boesky when his enterprise affiliate John Mulheren was charged with manipulating shares of Gulf & Western Industries Inc., in keeping with attorneys. Those prices had been reversed on attraction. Mr. Mulheren died in 2003.
“There haven’t been many of these cases,” mentioned Harvey Pitt, a former SEC chairman who represented Mr. Boesky. “They aren’t easy to win.”
The indictment lays out intimately how Archegos dominated buying and selling in sure shares by means of its use of derivatives.
Prosecutors allege that Messrs. Halligan, Tomita, Becker and others, with Mr. Hwang’s blessing, repeatedly lied about Archegos’s portfolio to the agency’s counterparties throughout Wall Street in an try to get them to commerce with, lengthen credit score to and conceal the grave danger of doing enterprise with Archegos. Archegos additionally deliberately labored with a number of lenders to interrupt up its trades, the indictment alleges, which allowed the agency to hide the scope of its actions.
U.S.-listed Chinese corporations had been amongst Archegos’s largest positions, and manipulated shares included ViacomCBS, Discovery Inc., now generally known as
Warner Bros. Discovery Inc.,
WBD -5.04%
GSX Techedu Inc., now generally known as
Gaotu Techedu Inc.,
China Internet search firm
Baidu Inc.
BIDU 5.89%
and luxurious on-line retailer Farfetch Ltd., in keeping with the indictment.
By late March 2021, the indictment mentioned, Archegos had positions of greater than $10 billion in GSX, Baidu and
Tencent Music Entertainment Group,
TME -0.99%
and greater than $20 billion in ViacomCBS.
In a text-message alternate with an analyst in June 2020, Mr. Hwang mentioned a latest uptick in ViacomCBS’s share value was “a sign of me buying,” adopted by a “tears of joy” emoji, in keeping with the SEC’s grievance.
The SEC mentioned ViacomCBS shares rose about 150% in three months, throughout a interval when Archegos was aggressively shopping for shares and swaps.
At occasions, Mr. Hwang coordinated trades in GSX with a “close friend and former colleague” partly to maximise the impression of Archegos’s trades, the indictment alleges. People acquainted with the matter mentioned that individual is Tao Li, who labored for Mr. Hwang when Mr. Hwang ran a hedge fund referred to as Tiger Asia Management. Mr. Li now runs his personal hedge fund referred to as Teng Yue Partners LP, which had a stake in GSX on the time of Archegos’s collapse.
Mr. Li didn’t return a name for remark left at Teng Yue, and a lawyer for Mr. Li didn’t remark.
The dynamics favoring Mr. Hwang had shifted by March 2021, by which period his technique had left Archegos extremely susceptible to volatility in a small variety of shares. Already pressured by mounting losses in corporations together with Baidu and Farfetch, the announcement of further financing by ViacomCBS in late March despatched its inventory value falling and successfully triggered the unraveling of Archegos.
Rather than promoting positions to fulfill margin calls from lenders, prosecutors allege, Mr. Hwang instructed his merchants “to engage in a desperate buying spree in an attempt to reverse the price declines of stocks underlying Archegos’s core positions.” But the efforts couldn’t stanch the bleeding.
Among the banks struggling losses in Archegos’s collapse had been
Credit Suisse Group AG
CS -3.40%
,
Nomura Holdings,
NMR -1.07%
Morgan Stanley
MS -0.19%
and
UBS Group AG
UBS 2.49%
.
—Dave Michaels contributed to this text.
Write to Corinne Ramey at [email protected], Susan Pulliam at [email protected] and Juliet Chung at [email protected]
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