US prosecutors charged the founder and chief financial officer of collapsed investor Archegos Capital Management with fraud on Wednesday morning in a move that is likely to start one of the biggest Wall Street white-collar prosecutions in years.
Archegos founder Bill Hwang and his former top lieutenant, Patrick Halligan, were arrested at their homes and are expected to appear in court later today.
The family-owned investment company imploded last year – losing $20bn in just two days – and causing billions in losses for banks, investors and its own employees.
Federal authorities charged Hwang with 11 criminal counts, including racketeering conspiracy, market manipulation and securities fraud and accused him of using Archegos as an “instrument of market manipulation and fraud” which had “far-reaching consequences for other participants in the United States securities markets”.
Their alleged crimes inflated the value of Archegos’s holdings from $1.5bn to $35bn in one year, according to a statement from Manhattan US attorney Damian Williams.
Archegos had relied on borrowed money to build its portfolio. Hwang used derivative securities with limited disclosure requirements that shielded the size of Archegos’ positions in the market from public scrutiny. As a result, US authorities allege, investors were unaware of the huge scale of Archegos’s holdings in a few select companies.
The company ran into trouble when its large holdings in China’s internet-search giant Baidu and luxury online retailer FarFetch started to fall. But it was Archegos’s large holdings in media company ViacomCBS, the owner of Paramount Pictures film and the CBS television studio, that sealed its fate.
“These defendants committed this fraud in the darkness,” Willams said at a press conference.
In March last year, ViacomCBS – now called Paramount – sought to capitalize on its rising share price by selling $2.6bn in new shares. Investors snubbed the deal, leading to a share price collapse. As Archegos’s losses mounted, banks called in their loans and dumped their shares to cover their losses.
The losses cost Credit Suisse $5bn. Other banks including Morgan Stanley, Nomura and UBS also lost heavily.
Separate civil charges against Hwang and Halligan were brought by the Securities and Exchange Commission (SEC).
“We allege that Hwang and Archegos propped up a $36bn 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,” said Gurbir Grewal, director of the SEC’s Division of Enforcement.
“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,” Grewal said.
In a statement Lawrence Lustberg of Gibbons PC, counsel for Hwang, said: “We are extremely disappointed that the US attorney’s office has seen fit to indict a case that has absolutely no factual or legal basis; a prosecution of this type, for open-market transactions, is unprecedented and threatens all investors.
“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.”
Gibbons said it was “even more disappointing” that the government had arrested Hwang without notice, “while substantive discussions about the facts and law were ongoing between Mr Hwang’s counsel and the government.” He said Hwang had made himself available and fully cooperated with the government’s investigation.