Archegos Capital Management founder and CEO Bill Hwang, as well as his CFO Patrick Halligan, were placed under arrest by federal agents this week and were charged with fraud, conspiracy, and racketeering.
The federal indictment comes a year after their family investment office imploded. Prosecutors allege Hwang used Archegos to manipulate the markets and commit fraud, causing banks to lose billions of dollars. It’s also alleged that investors in other markets lost millions, and even their own employees lost money,.
The fraud scheme allegedly increased Archegos’ capital, which was most of Hwang’s money, from $1.5 billion to more than $35 billion in only a year, according to the federal indictment.
The family office financially collapsed because of billions of dollars in losses for several banks and Archegos’ own workers. The scandal also has shed light on family office risks. These are private funds that aren’t as well regulated as hedge funds.
Federal Documents Say The Men Used Leverage To Boost Market Positions
According to federal documents, the two men used leverage to boost their market positions, which increased by as much as $160 billion. It’s alleged that Hwang used derivative securities that did not have public disclosure standards. This helped to protect the market positions of Archegos. That’s why investors didn’t know that Archegos was dominant in the trading of several companies.
The firm’s family office focused its resources on several companies that including GSX Techedu in China, Discovery Communications, and ViacomCBS. However, the financial scheme fell apart in March 2021 when the stock prices dropped and Archegos couldn’t continue to keep its financial positions in the market.
The company also couldn’t meet margin calls and the company’s counterparties also had heavy financial losses.
Financial insiders say Credit Suisse suffered the worst losses with more than $5 billion wiped off its books when Archego’s family office collapsed. Morgan Stanly, Nomura, and UBS also lost millions of dollars.
In addition to the federal criminal charges filed in the US Attorney’s Office for the Southern District Of New York, the SEC has filed civil charges, too.
SEC Chair Gary Gensler stated this week that the Archegos collapse last year showed how actions by one financial company can have major consequences for the market and investors.
Hwang Used Derivative Securities With No Public Reporting Standards
Federal agents say Archegos used derivative securities without public reporting requirements, which is the reason the company began to dominate the owner of stock for several big companies. The investing public didn’t know, prosecutors allege.
The feds added that Hwang and Halligan corrupted their family office to engage in stock price manipulation and lie to brokerages and banks.
Archegos, which has been a family office run by Hwang, a former Tiger Asia manager, defaulted on several margin calls in 2021. This left victim banks with billions in losses. It also led to a huge sale of Discovery and ViacomCBS shares.
The Archegos fund first hit rough water in March 2021 when share prices slid for ViacomCBS, which the company invested heavily with borrowed money.
The decline in the stock price set off red flags and alarms at large banks. They told the fund they had to repay their loans or provide additional collateral.
But Archegos was only able to bring enough cash to meet the margin calls by selling its shares. This only would lead to a bigger crash in prices. Prosecutors allege that Hwang decided to funnel billions of loaned money into the crashing stocks to boost the price.
When that plan fell through, banks began selling off collateral. This included shares at Tencent Music Entertainment and Baidu Inc.
Hwang Began As A Stock Trader in the 1990s
Hwang has been on the Wall Street scene for more than 20 years, beginning as a stockbroker for Hyundai Securities. He worked for years with famous investor Julian Robertson at Tiger Management and was called one of his Tiger Cubs.
Later, Hwang founded Tiger Asia Management with $25 million loaned by Robertson, and the fund eventually grew to $5 billion. But it all crashed down when Hwang was accused of insider trading a decade ago.
Wall Street refused to work with Hwang for years after he paid $44 million in fines and closed his firm.
Hwang rebounded when he founded a private investment company called Achegos Capital Management. His skill at choosing profitable stocks began to persuade large banks they couldn’t ignore him anymore.
The last bank to agree to work with Hwang again was Goldman Sachs, which only said it would do so in 2020 after several bankers convinced the company’s risk department.
They argued that under Hwang’s leadership, Archegos increased from $200 million in assets to more than $10 billion, an astonishing 4900% increase. The execs argued that the risk was worth it.
Hwang – Quietly One Of The Country’s Richest Men
Until the family office came crashing down last year, Hwang was one of the wealthiest men in the US, but he lived quietly in New Jersey. His dad was a pastor in Korea who came to the US when Hwang was a boy. His mother served as a Christian missionary in Mexico for many years.
Hwang earned his bachelor’s in business and MBA at Carnegie Mellon and UCLA. He is openly Christian, which is unusual in the high-powered world of Wall Street finance.
Hwang has said in several online videos that life isn’t all about money. “It’s more about helping others learn how to invest and use capitalism to help society.”