Archegos owner Bill Hwang, former CFO charged with fraud and hit with SEC complaint

Bill Hwang, owner of Archegos Capital Management, and former chief financial officer Patrick Halligan were arrested and charged with racketeering conspiracy, securities fraud and wire fraud.

The same day that prosecutors with the U.S. Attorney’s Office for the Southern District of New York announced the charges, the Securities Exchange Commission filed a complaint against Archegos, Hwang, Halligan, former Archegos chief risk officer Scott Becker, and former head trader William Tomita.

WHO IS ARCHEGOS FUND MANAGER BILL HWANG?

The SEC complaint alleges that they engaged in "a fraudulent scheme … that included interlocking deceptive acts and misconduct" that included "false and misleading statements" and "manipulative trading designed to artificially move the market."

The complaint discusses how Archegos, through Hwang’s direction, used security-based swaps (SBSs) that allow investors to put up relatively little money in order to take on significant positions in equity securities. This, the complaint says, left Archegos subject to "significant exposure to rising and falling share prices of the issuers referenced in its SBSs."

Facing pressure to maintain the growth it achieved, the complaint alleges, "Archegos engaged in a brazen scheme to manipulate the market for the securities of the issuers that represented Archegos’s top 10 holdings … both through purchases of the issuers’ securities and entry into SBSs referencing those issuers."

The company allegedly made misrepresentations about its liquidity and exposures to SBS counterparties in order to get them to extend credit margin and trading capacity.

CREDIT SUISSE'S EXPOSURE TO ARCHEGOS INVESTMENTS GREW TO MORE THAN $20 BILLION

Over the course of a year, from March 2020 to March 2021, Archegos’ value went from roughly $1.5 billion over $36 billion, while its exposures ballooned from $10 billion to $160 billion.

"Eventually, the weight of Defendants’ fraudulent and manipulative scheme was too much for Archegos to bear, and over the course of less than a week in late March 2021, the house of cards collapsed," the complaint states.

When Archegos could not meet margin calls and they could no longer "artificially inflate the prices" of its top ten holdings, stock prices plummeted. Counterparties and stock investors suffered heavy losses as a result.

"We allege that Hwang and Archegos propped up a $36 billion house of cards by engaging in a constant cycle of manipulative trading, lying to banks to obtain additional capacity, and then using that capacity to engage in still more manipulative trading," Gurbir Grewal, Director of the SEC’s Division of Enforcement, said in a statement. "But the house of cards could only be sustained if that cycle of deceptive trading, lies and buying power continued uninterrupted, and once Archegos’s buying power was exhausted and stock prices fell, the entire structure collapsed, allegedly leaving Archegos’s counterparties billions in trading losses."

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The SEC is looking for Archegos and the officials to pay civil monetary penalties, and to be disgorged of "all ill-gotten gains" that resulted from the alleged activities.

"Today, we charged Archegos Capital Management and affiliated individuals with committing fraud and manipulating stock prices using total return swaps. The collapse of Archegos last spring demonstrated how activities by one firm can have far-reaching implications for investors and market participants," SEC cChair Gary Gensler said in a statement. "The failure of Archegos underscores the importance of our ongoing work to update the security-based swaps market to enhance the investor protections, integrity, and transparency of this market. Further, I encourage prime brokers and other market participants to remain vigilant to the risks presented by counterparty relationships."

Hwang and Halligan are denying wrongdoing. In response to the federal indictment, Hwang's attorney Lawrence S. Lustberg said the case "has no factual or legal basis."

"[A] prosecution of this type, for open-market transactions, is unprecedented and threatens all investors," Lustberg continued. "As you will see when the facts unfold, Bill Hwang is entirely innocent of any wrongdoing; there is no evidence whatsoever that he committed any kind of crime, let alone the overblown allegations that pervade this indictment."

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Lustberg also said it was "disappointing" that federal authorities arrested Hwang "without notice," even though Hwang's counsel was in talks about the matter with the government.

"The US Attorney’s Office well knew Mr. Hwang would voluntarily surrender if asked to do so," Lustberg said, adding that "Mr. Hwang has made himself available and fully cooperated with the Government’s investigation."

Mary Mulligan, attorney for Halligan, said her client "is innocent and will be exonerated."