“Are we going to be able to pay for these transactions today? I don’t see how we can do that.”
The deputy’s words, now immortalized in a federal indictment, said it all: Panic set in Bill Hwang’s Archegos Capital Management. Hwang, the enigmatic billionaire behind Archegos, had amassed one of the world’s great fortunes in virtual secrecy, and that treasure — a staggering $160 billion position in stocks — was disintegrating everywhere in one fell swoop.
That was March 23, 2021 — and Wall Street had no idea what was going to happen.
A year after the collapse of Archegos sent shockwaves through the global financial world, Hwang was arrested Wednesday morning and, for the first time, federal prosecutors offered an official account of what really happened at the secretive family office.
The chaotic story depicted in the 59-page indictment charts a rapid rise and fall in wealth unlike anything Wall Street has seen before. Hwang, a devout Christian who lived in modest surroundings in suburban New Jersey despite his wealth, believed to the end that he could single-handedly manipulate world markets, prosecutors say. Overconfidence and greed, prosecutors say, have spawned a blatant scheme to deceive big banks and manipulate markets.
If convicted on all counts, Bill Hwang faces a maximum sentence of 380 years in prison. (File)
Archegos founder Bill Hwang & CFO Patrick Halligan charged with securities fraud Bill Hwang, chief executive officer and founder of Archegos Capital Management LP, departed from federal court in New York, US, on Wednesday, April 27, 2022. Financial Officer Patrick Halligan with fraud, in the final fallout from the spectacular collapse of the family office.
Hwang and Archegos’ chief financial officer Patrick Halligan both pleaded not guilty to 11 criminal charges on Wednesday, including conspiracy to charge racketeering, market manipulation, wire transfer fraud and securities fraud. Gray-haired Hwang, dressed in a blue Patagonia vest, was released on $100 million bail. They are due to appear in court again on May 19.
Prosecutors say Hwang’s plan began to unravel after his personal fortune rose from $1.5 billion to $35 billion in a year. Archegos persuaded major banks to lend the company huge sums to leverage its stock market bets – ultimately with catastrophic consequences.
His passing came after ViacomCBS Inc., one of Hwang’s major companies, began to decline after the sale of new shares. Archegos was unlikely to be able to make the margin calls, causing panic within the company and the banks that had lent Hwang billions.
Hwang’s response: He demanded that his traders buy the shares. Then buy some more. In the end, Archegos added $900 million in a day.
Scott Becker, the chief risk director, protested. The company’s chief trader, William Tomita, made his own plea to Hwang, but came back with his tail between his legs: “I spoke to Bill and he said to just continue fulfilling the orders.” (Both have pleaded guilty and are cooperating with authorities.)
It didn’t work and the Archegos leadership team prepared for margin calls the next day. Hwang had other ideas and instead encouraged traders to use the company’s last cash to manipulate certain stocks to support their price. All the while, Becker took as much money as possible from Wall Street’s banks, falsely claiming that the family office had $9 billion in excess cash while it ran on fumes.
The indictment documents, the press conference and the court appearance left many questions unanswered, including the big one: How exactly did Hwang think this would all end?
Even if Archegos wasn’t quite another long-term capital management company – as some feared at the time – it left its own scars on the financial world. The episode saddled global banks with billions of dollars in losses, encouraged a fresh look at disclosure requirements for the investment firms of the ultra-rich, and inspired a sweeping US investigation into how Wall Street handles big block transactions.
It’s all the more impressive given that Hwang was largely unknown before Archegos’ spectacular collapse, save for a small group of executives affiliated with hedge fund legend Julian Robertson.
Hwang worked for Robertson at his $20 billion Tiger Management until it closed, and then started his own company, Tiger Asia. He was one of Robertson’s most successful ex-employees – until he got involved with regulators.
In 2012, after years of investigation, the US Securities and Exchange Commission accused Tiger Asia of insider trading and manipulation of Chinese banking stocks. The agency said Hwang “crossed the wall” by receiving confidential information about pending stock offers from the acquiring banks and then using it to make illicit profits.
Hwang settled that case without admitting or denying wrongdoing, and Tiger Asia pleaded guilty to a Justice Department charge of wire fraud.
The incident forced him to step out of the money management industry, but he said it strengthened his faith.
He founded Archegos – a Greek word often translated “author” or “captain”, and often taken as referring to Jesus – to manage his own personal fortune.
While trading his own fortune in Archegos, Hwang held Bible readings at 7 a.m. on Friday mornings, when 20 or 30 people sat together at a long table and listened to recordings of the Bible over coffee and Danish.
Hwang also founded the Grace and Mercy Foundation, which grew into hundreds of millions of dollars in assets and supported largely Christian organizations.
He has also seeded funds managed by Cathie Wood’s Ark Investment Management. Like Hwang, Wood is known for hosting Bible study meetings and figures in what some call the “faith in finance” movement.
But as the federal government tells it, something fundamental changed in Hwang’s investment process when the Covid-19 pandemic hit. His holdings were once in large and highly liquid stocks. But he soon turned to smaller companies, including a handful of Chinese ADRs.
He increasingly ignored internal investigations from Archegos analysts over the course of 2020 and 2021, having previously held weekly strategy meetings, according to the expense documents. Instead, “Hwang often spent almost his entire working day with the traders.”
In some cases, Hwang instructed traders to sell a stock in the morning or enter a short position, giving the family office more trading capacity to buy when it needed to raise the price.
“Hwang referred to this practice as using ‘bullets’,” the indictment said. “Hwang instructed traders to use the ‘bullets’ or trading capacity at appropriate times that would create upward pressure on the stock price. Hwang increasingly adopted this strategy as counterparties began to curtail or restrict its access to additional trading capacity.”
As his bets got bigger and bigger, Hwang expanded Archegos’ list of banks, giving him leverage – allegedly without the others knowing about it.
In early 2021, just before the collapse, Archegos held over 50% in GSX Techedu Inc. and Viacom. Hwang coordinated transactions with an individual identified as “Adviser-1,” who according to Bloomberg News is Tao Li, the head of Teng Yue Partners, a New York-based hedge fund that has oversaw $4 billion since last year. Li is also betting heavily on GSX.
Li and Teng Yue have not been charged with wrongdoing by US authorities, and Teng Yue did not respond to messages asking for comment.
Ultimately, Archegos’ losses hit the world as banks were forced to dump large blocks of stock into the market.
In Japan, Nomura Holdings Inc. a blow of $2.9 billion. Credit Suisse Group AG suffered a $5.5 billion blow. And in New York, Morgan Stanley revealed a loss of $911 million.
According to the government narrating the episode of Archegos, the banks were victims of his fraud. But one of the most enduring elements of its collapse is the way it inspired federal regulators to dig into the way Wall Street settled Hwang’s massive portfolio.
That, in turn, prompted them to look at how Morgan Stanley and possibly other banks handled block transactions.
The US Attorney’s Office for the Southern District of New York, which is prosecuting Hwang, is now gathering evidence on whether or not banks are involved in illegal activities, specifically whether some market participants were tipped off ahead of time when a major transaction was imminent . market.
(Except for the headline, this story has not been edited by DailyExpertNews staff and has been published from a syndicated feed.)