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Sung Kook “Bill” Hwang put the entire financial system at risk by conspiring with his former chief financial officer to boost profits for his Archegos Capital Management by lying to banks to inflate the stock prices of publicly traded companies, federal prosecutors said on Wednesday, April 27.
The fraud scheme ballooned Hwang’s personal fortune from $1.5 billion to more than $35 billion in a single year, alleges a grand jury indictment returned in Southern District of New York Court in Manhattan.
Combined with investments borrowed from major banks and brokerages, the stock positions of Hwang’s company eventually reached $160 billion — rivaling some of the world’s biggest hedge funds, the indictment against him and former Achegos CFO Patrick Halligan says.
The scheme inevitably collapsed, costing leading global investment banks and brokerages billions in losses, it says.
Also victimized, prosecutors said, were innocent Archegos employees who worked in a glass skyscraper across from Manhattan’s Carnegie Hall and were required to accept deferred compensation from the private investment firm.
Federal agents arrested Hwang and Halligan, of Syosset, Long Island at their homes early Wednesday. Each later pleaded not guilty to racketeering and securities fraud charges in federal court in Manhattan before being released.
Hwang had to post a $100 million bond secured by two properties and $5 million in cash, according to various news reports. The judge also restricted his travel to the New York area and ordered him to show proof of a claim that he’d lost his passport.
Defense attorney Lawrence Lustberg, who represents Hwang, said the “exaggerated allegations that permeate this indictment” have “absolutely no factual or legal basis.”
Halligan attorney Mary Mulligan said her firm’s client is innocent and will be exonerated.
Hwang kick-started the scheme by using personal money to leverage loans from banks and brokerages to bulk-buy shares of Discovery, GSX and other companies, the 59-page indictment alleges, federal authorities said.
Because such "family office" operations aren't as tightly regulated as hedge funds, none of the involved institutions knew what Hwang was up to, they said.
At one point, Archegos secretly controlled more than half of ViacomCBS’ shares, the prosecutors said.
Last March, the prices of the stocks declined, undercutting Archegos' positions. A subsequent collapse followed defaults on a flood of margin calls.
An estimated $100 billion in shareholder value vanished in just three days, the indictment says. Victims included Morgan Stanley, Nomura and Credit Suisse, which lost more than $10 billion combined.
“This scheme was historic in scope,” U.S. Attorney Damian Williams said Wednesday at a news conference in Manhattan announcing the charges. “The lies fed the inflation and the inflation led to more lies. Round and round it went.”
The massive fraud “almost jeopardized our financial system,” Williams said.
The defendants lied about their investments and how much money they had on hand so that the banks "would have no idea that Archegos was planning a big market manipulation scheme," he said.
“[Then] the music stopped. The bubble burst. The prices dropped," Williams said. "And when they did, billions of dollars of capital evaporated nearly overnight.”
Two other Archegos employees – head trader William Tomita, of Greenwich, CT, and chief risk officer Scott Becker, of Goshen, NY – pleaded guilty last week and have been cooperating with federal authorities, Williams said. That means they could be called on to testify against Hwang and Halligan.
It’s actually a dubious anniversary for Hwang, who a decade ago was running an Asia-focused hedge fund when federal authorities accused him and his then-company, Tiger-Asia Management, of engaging in insider trading involving Chinese bank stocks.
Hwang pleaded guilty in U.S. District Court in Newark in 2012 to a single count of wire fraud and agreed to forfeit $16 million to the government in exchange for a year’s probation.
In tandem with the criminal indictment announced Wednesday, the U.S. Securities and Exchange Commission and the Commodity Futures Trading Commission filed civil suits against Hwang, Halligan and two former traders.
“The collapse of Archegos last spring demonstrated how activities by one firm can have far-reaching implications for investors and market participants,” SEC Chair Gary Gensler said in a release.
Hwang and his company “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,” said SEC Division of Enforcement Director Gurbir S. Grewal.
“But the house of cards could only be sustained if that cycle of deceptive trading, lies and buying power continued uninterrupted,” said Grewal, a former New Jersey attorney general, Bergen County prosecutor and, before that, assistant U.S. attorney in Newark.
“Once Archegos’s buying power was exhausted and stock prices fell, the entire structure collapsed, allegedly leaving Archegos’s counterparties billions in trading losses,” he said.
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