Bill Hwang’s Archegos Catastrophe Was Wilder Than Anyone Knew

Bill Hwang, the founder of Archegos Capital Management, was arrested Wednesday over what federal prosecutors characterized as a vast, criminal scheme to mislead banks and manipulate markets. Hwang was charged with fraud, and Patrick Halligan, the CFO of Archegos, was also arrested and charged with fraud. If convicted of all charges, Hwang faces as many as 380 years in prison. Both men pleaded not guilty in a lower Manhattan courtroom Wednesday and were released on bail.

The collapse of Archegos – Hwang’s family office that was virtually unknown even on Wall Street – exposed gaping holes in how major banks manage their risks, as well as in how regulators oversee Wall Street. A year on, Credit Suisse AG, among others, is still coping with the fallout. Hwang’s spectacular gains and losses extended to such well-known stocks as entertainment giant ViacomCBS Inc.

The two men were charged with 11 criminal counts, including racketeering conspiracy, market manipulation, wire fraud and securities fraud, according to an indictment unsealed Wednesday. The U.S. Securities and Exchange Commission and the Commodity Futures Trading Commission filed related civil complaints as well.

Some of the allegations made by prosecutors have been known since Archegos’s implosion, such as Hwang’s use of swaps to keep the fund’s stock positions below 5% to avoid triggering required disclosures, and his misleading banks about his portfolio composition and the specific stocks he wagered on.

But authorities revealed the extent of the fraud: Hwang allegedly inflated the value of his portfolio from $1.5 billion to more than $35 billion in one year, and brought the total size of Archegos’s market positions -- including borrowed money -- to a whopping $160 billion at its peak.

“The scale of the trading was stunning,” Damian Williams, the U.S. Attorney for the Southern District of New York, told reporters Wednesday. “This was not business as usual or some sophisticated strategy -- it was fraud.”

The documents also reveal a shift in Hwang’s investment process that began after his move to remote work with the Covid-19 pandemic, spending more time communicating with traders than analysts.

Prosecutors also allege that Hwang coordinated certain trades with a close friend and former colleague at an unnamed hedge fund to maximize his market impact. The fund manager, identified only as “Adviser-1”, is Tao Li, the head of Teng Yue Partners, Bloomberg reported Wednesday. Li, an acolyte of Hwang’s, and Teng Yue haven’t been accused of wrongdoing, and the firm didn’t respond to messages seeking comment.

“Bill Hwang is entirely innocent of any wrongdoing,” his lawyer Lawrence Lustberg said in a statement. “There is no evidence whatsoever that he committed any kind of crime, let alone the overblown allegations that pervade this indictment.” Lustberg said Hwang had been cooperative with investigations into Archegos.

The CFO’s lawyer, Mary Mulligan, said in a statement, “Pat Halligan is innocent and will be exonerated.”

With his sweptback salt-and-pepper hair and donning a face mask, green turtleneck and tan pants, Hwang appeared in court Wednesday afternoon to enter his not guilty plea. He agreed to pay $5 million in cash and pledged two properties to secure a $100 million bond, while Halligan agreed to $1 million bail. Both men agreed to restrict their travel.

The indictment said Archegos’s positions were inflated with the use of borrowed money and derivative securities that required no public reporting. When the market turned against the positions in March 2021, Hwang directed the fund’s traders to go on a buying spree in an attempt to prop up their price, federal prosecutors charged.

In addition to Hwang and Halligan, the U.S. named William Tomita and Scott Becker, former senior executives at Archegos, as conspirators. They have pleaded guilty and are cooperating with authorities. The men, who were named as defendants in the SEC suit, have also agreed to work with the CFTC and SEC.

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