The New York-based hedge fund owner who collapsed when he defaulted on margin calls was arrested on Wednesday on charges alleging he defrauded major global investment banks and houses brokerage of billions of dollars.
The charges were disclosed in an indictment in Manhattan federal court named Bill Hwang, the founder of Archegos Capital Management, and its former chief financial officer, Patrick Halligan. Prosecutors allege Hwang told lies to banks and brokerage houses so his private investment firm could grow his portfolio from $10 billion to $160 billion.
Both men pleaded not guilty to charges of racketeering conspiracy and fraud through their lawyers during an arraignment. Hwang was released on $100 million bail while Halligan was released on $1 million bail.
US attorney Damian Williams told a press conference that the scheme “almost jeopardized our financial system”.
“But last year, the music stopped. The bubble burst. Prices plummeted. And when they did, billions of dollars of capital evaporated almost overnight,” a- he declared.
Williams said Archegos chief trader Scott Becker, 38, of Goshen, and William Tomita, 38, of Greenwich, Connecticut, the firm’s chief risk officer, pleaded guilty last week to their participation in the conspiracy and cooperating with the government.
The prosecutor said the defendants lied to the banks to obtain billions of dollars which they used to inflate the stock prices of publicly traded companies.
“Lies fueled inflation and inflation led to more lies,” he said. “It went in circles.”
Williams said that at one point, Hwang and his company secretly controlled over 50% of ViacomCBS stock.
Hwang, 58, of Tenafly, New Jersey, committed the fraud from March 2020 to March 2021 by originally investing his personal fortune, which grew from $1.5 billion to over $35 billion, and later the investments he borrowed from major banks and brokerage houses, which grew from about $10 billion to more than $160 billion, according to the indictment.
He hid the extent of his market prowess from investors by using derivative securities that had no public disclosure requirements, he said.
“As a result, despite the size of Archegos’ positions, the investing public was unaware that Archegos had come to dominate the trading and shareholding of several companies,” the indictment states.
The risky moves left the firm’s portfolio highly vulnerable to price swings in a handful of stocks, prompting a wave of margin calls in late March 2021 that had a destructive domino effect. More than $100 billion in market value vanished in a matter of days for nearly a dozen companies and banks and prime brokers duped by Archegos who lost billions, according to the indictment.
He said the schemes also caused millions of dollars in losses to innocent Archegos employees who were required to allocate a substantial portion of their salary to the company as deferred compensation.
Separate civil charges against Hwang and Halligan, 45, of Syosset, have been filed by the Securities and Exchange Commission.
In a statement, SEC Chairman Gary Gensler said, “The collapse of Archegos last spring demonstrated how a company’s activities can have far-reaching implications for investors and market participants.”
“We allege that Hwang and Archegos sustained a $36 billion house of cards by engaging in a constant cycle of manipulative transactions, lying to banks to gain additional abilities, and then using that ability to engage in even more manipulative transactions,” said Gurbir S. Grewal, director of the SEC’s Division of Enforcement.
“But the house of cards could only be sustained if this cycle of deceptive transactions, lies and buying power continued uninterrupted, and once Archegos’ buying power was exhausted and stock prices shares were falling, the whole structure was collapsing, allegedly leaving Archegos counterparties with billions in trading losses,” Grewal said.
Hwang’s attorney, Lawrence Lustberg, said the attorneys are “extremely disappointed” with a lawsuit they say has “absolutely no factual or legal basis.”
“A lawsuit of this type, for open-market transactions, is unprecedented and threatens all investors,” he said in a statement. “As you will see when the facts unfold, Bill Hwang is entirely innocent of any wrongdoing; there is no evidence that he committed any crime, not to mention the exaggerated allegations that permeate this indictment.
Lustberg said it was also disappointing that Hwang was arrested without notice, even though he “made himself available and cooperated fully with the government’s investigation.”
“We vehemently contest the charges in law and in fact and are confident that we will prevail in court, but in no case was an arrest necessary in this case, amid an investigation that has been going on for more than ‘a year. and apparently remains ongoing,” he wrote.
Attorney Mary Mulligan, representing Halligan, said: “Pat Halligan is innocent and will be exonerated.”