(Bloomberg) – Bill Hwang, the enigmatic investor behind one of the most spectacular trade disasters in Wall Street history, was arrested on Wednesday morning for what federal prosecutors described as a large-scale criminal scheme to defraud banks and manipulate markets.
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A year after the collapse of Huang’s private investment firm, Archegos Capital Management, sent shockwaves into global finance, prosecutors provided their first full account of what happened at the company – and new details about Huang’s trading scale and the origins of its strategy.
Hwang was accused of fraud, and Patrick Halligan, CFO of Archegos, was also arrested and charged with fraud. If convicted, Huang faces up to 380 years in prison. Both men pleaded not guilty in Manhattan’s lower courtroom on Wednesday and were released on bail.
The collapse of Archegos – Hwang’s family office, which was almost unknown even on Wall Street – revealed gaping holes in the way big banks manage their risks, as well as in the way regulators monitor Wall Street. A year later, Credit Suisse AG, among others, is still dealing with the consequences. Hwang’s spectacular gains and losses extend to such well-known stocks as entertainment giant ViacomCBS Inc.
The two men were charged with 11 counts of conspiracy, including conspiracy to racketeer, market manipulation, wire fraud and securities fraud, according to an indictment released Wednesday. The US Securities and Exchange Commission and the Commodity Futures Trading Commission have also filed related civil complaints.
Huang’s arrest reveals surprising details about the spectacular decline
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Some of the allegations made by prosecutors have been known since the collapse of Archegos, such as the use of Hwang swap to keep the fund’s positions below 5% to avoid triggering required disclosures, and misleading banks about portfolio composition. his and the specific shares on which he bet.
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But authorities on Wednesday uncovered the extent of the fraud: Huang is said to have inflated the value of his portfolio from $ 1.5 billion to more than $ 35 billion in one year and brought Archegos’ total market position – including borrowed money – to an incredible $ 160 billion at its peak.
“The scale of the trade has been staggering,” Damien Williams, the U.S. Attorney General for New York’s Southern District, told reporters Wednesday. “It wasn’t the usual business or a complicated strategy – it was a scam.
The documents also reveal a change in Huang’s investment process that began after he switched to remote work with the Covid-19 pandemic, spending more time interacting with retailers than analysts.
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Prosecutors also say Huang coordinated certain deals with a close friend and former colleague at an unnamed hedge fund to maximize his impact on the market. The fund’s manager, identified only as “Advisor-1”, is Tao Li, head of Teng Yue Partners, Bloomberg reported on Wednesday. Li, Huang’s aide, and Teng Yue were not charged with wrongdoing and the company did not respond to messages requesting comment.
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“Bill Huang is completely innocent of any wrongdoing,” his lawyer, Lawrence Lustberg, said in a statement. “There is no evidence that he committed any crime, let alone the exaggerated allegations that permeate this charge. Lustberg said Huang cooperated with Archegos’ investigations.
CFO attorney Mary Mulligan said in a statement: “Pat Halligan is innocent and will be acquitted.
With his hair streaked with salt and pepper and a face mask, green turtleneck and brown pants, Huang appeared in court on Wednesday afternoon to plead not guilty. He agreed to pay $ 5 million in cash and pledged two properties to secure a $ 100 million bond, while Halligan agreed to a $ 1 million guarantee. Both men agreed to limit their travel.
The indictment alleges that Archegos’ positions were overstated by the use of borrowed money and derivative securities that did not require public reporting. When the market turned against the positions in March 2021, Huang ordered the fund’s traders to start buying in an attempt to maintain their price, federal prosecutors accused.
In addition to Hwang and Halligan, the United States has named William Tomita and Scott Becker, former top executives at Archegos, as conspirators. They pleaded guilty and cooperated with the authorities. The men who were named as defendants in the SEC case also agreed to work with the CFTC and the SEC.
Speaking at a white-collar crime conference in New York on Wednesday morning, U.S. Attorney General Lisa Monaco said the case against 57-year-old Huang and 45-year-old Halligan “is really typical and illustrates the focus we are on responsibility of individuals when it comes to corporate crime and when it comes to corporate abuse. “
Bank losses
Archegos fell apart after amassing a concentrated portfolio of stocks using borrowed money. It collapsed after some shares fell, prompting margin calls from banks, which then dumped Huang’s holdings. Banks lost more than $ 10 billion, leading several senior executives to leave and investigating the way companies monitor the risks taken by their hedge fund businesses.
The situation differed between the companies that Archegos dealt with: Credit Suisse, Nomura Holdings Inc. and Morgan Stanley suffered some of the biggest losses. Others, including Goldman Sachs Group Inc., Wells Fargo & Co. and Deutsche Bank AG escaped relatively unharmed.
Prosecutors said Hwang and Halligan “have repeatedly made substantially false and misleading statements about Archegos’ portfolio of securities to many of the world’s leading investment banks and brokerage agencies,” which encouraged them to trade and lend to Archegos, the government said.
Authorities said Huang was aware that Archegos could move the market.
In June 2020, when an Archegos analyst sent him a message saying that the increase in ViacomCBS’s share price that day was a “sign of strength”, Huang replied: “No. It’s a sign that I’m buying “, followed by emoji” tears of joy “.
In addition to ViacomCBS, which has since been renamed Paramount Global, the securities allegedly manipulated by Hwang include Discovery Communications Inc., Tencent Music Group, Texas Capital Bancshares Inc. and Rocket Companies Inc.
It is alleged that the criminal conduct involved concealment and fraud of the true size of the positions, liquidity and concentration of the fund by counterparties by disseminating transactions with several different banks. When banks began asking the fund about the size of its positions, he usually claimed that each individual contribution was no more than 35% of its capital; In fact, prosecutors said, its stake in Viacom at one point amounted to 96% of its capital.
“Execution of orders”
That included buying shares just to keep them high, prosecutors say.
The scheme began to unravel on March 23 last year, prosecutors said, on the day Viacom announced a secondary offering of shares. Shares began to decline in anticipation of more stocks coming to market; Viacom was such a key holding company for Archegos that Hwang tried to protect the price by engaging in “extreme trading” in an attempt to dominate the market. Although Halligan questioned the strategy, Huang told his traders “just keep executing orders,” according to the indictment. The effort failed.
Prosecutors said Hwang usually invests through cash purchases until the size of his positions approaches 5% of the company’s shares. As he approached this threshold, he would move to a new method of trading to avoid public disclosure of his holdings.
Using the so-called “full return swap”, he will enter into contracts with banks that will pay off if stock prices rise, but will impose costs if they fall. In some cases, his position is equal to more than 50% of the shares of the companies in which he has invested, according to the indictment.
“They lied a lot,” U.S. Attorney Williams said Wednesday. “They lied about how big Archegos’ investments have become, they lied about how much money Archegos has, they lied about the nature of the shares that Archegos owned. They told these lies for a reason – so that the banks have no idea that Archegos has indeed devised a big scheme to manipulate the market.
(Updates with a potential sentence of imprisonment in the third paragraph.)
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