Three years ago, a multibillion-dollar investment firm called Archegos Capital Management exploded without warning, causing heavy losses for some Wall Street banks and leading to federal criminal charges against the firm’s founder, Bill Hwang.
On Wednesday, Hwang, 60, charged with 11 counts of securities fraud, wire fraud, conspiracy, racketeering and market manipulation, will stand trial in federal court in Manhattan. If convicted, he could spend the rest of his life in prison.
Federal prosecutors are trying to secure a conviction in a major stock market manipulation case in which Hwang, whose legal name is Sung Kook Hwang, was one of the biggest financial losers. Archegos had managed money primarily for Hwang, his family and some of his employees, and much of his family’s wealth disappeared when the company collapsed in March 2021. Also on trial with Hwang is Patrick Halligan, former CFO. Archegos official.
Authorities have said Archegos inflated the prices of stocks it invested in by using tens of billions of dollars borrowed from Wall Street banks to keep buying more and more shares. Rising stock prices encouraged other investors to buy, driving prices up even further. At its peak, the strategy increased Mr. Hwang’s net worth to more than $35 billion, and the total value of shares held by Archegos was more than $100 billion.
Damian Williams, the U.S. attorney for the Southern District of New York in Manhattan, called Archegos’ plan to boost the stock price “historic in scope” when his office announced the filing of charges against Hwang and Halligan in April 2022. .
Barry Berke, Hwang’s attorney, declined to comment. But in a court hearing a few months ago, Berke said his client “never sold a cent of his stock.”
Mary Mulligan, Mr Halligan’s lawyer, said: “This is a case that should not have been brought.”
Archegos was little known before its collapse and was not subject to much regulatory oversight because it did not manage money for outside investors. However, it operated like a large hedge fund given the level of risk it had taken and its huge loans to banks, mainly through the use of sophisticated derivative contracts.
The company prospered whenever the prices of the shares it bought continued to rise. But Archegos, which Hwang named after the Greek word for leader or prince, apparently couldn’t withstand a sudden drop in the market. He collapsed when some of the stocks he had invested in lost value, prompting Wall Street banks to seize securities and demand that the company post more money as collateral.
The impact of the Archegos bankruptcy on the stock market was limited, but several banks suffered losses. Credit Suisse, which has since acquired UBS, lost $5.5 billion. UBS itself lost around $861 million on loans to Archegos. Last summer, UBS agreed to pay nearly $400 million to U.S. and British regulators over Credit Suisse’s risk rulings in the Archegos matter. Nomura and Morgan Stanley were among the banks that also lost money.
If convicted on all charges, Hwang could, in theory, be sentenced to 220 years in prison, although a 20-year sentence is more realistic. By comparison, Samuel Bankman-Fried, the crypto entrepreneur who was sentenced in March to 25 years in federal prison for defrauding clients of $8 billion, faced a maximum sentence of 110 years.
The trial begins with jury selection on Wednesday. Prosecutors intend to call as witnesses two former Archegos employees who pleaded guilty and agreed to cooperate with the investigation.
Federal authorities said a critical component of the scheme involved Archegos officials misleading banks about the company’s overall footprint in the market. Authorities also maintained that Mr. Hwang had engaged in a “pump and brag scheme,” a strategy designed to substantially increase the company’s stock holdings and make Mr. Hwang appear like an “extremely wealthy person.”
But prosecutors have yet to explain how Hwang planned to profit by driving up the prices of shares Archegos owned. Even the federal judge presiding over the trial said he was baffled by Hwang’s strategy of simply buying more and more shares.
“What did he want? What did he want to achieve? To be a big shot. I suppose it’s possible, but it doesn’t seem to me that that was his goal,” Judge Alvin Hellerstein said at a hearing last year. “I can’t understand his goal. “.
Prosecutors have said testimony about Hwang’s possible exit strategies will be presented at trial.
This is the second time Hwang, a former hedge fund manager, has been accused of violating federal securities laws.
In 2012, he reached a civil settlement with the Securities and Exchange Commission in an insider trading investigation involving his former hedge fund, Tiger Asia Management, and was fined $44 million. Mr. Hwang was not criminally charged, but Tiger Asia pleaded guilty to federal insider trading charges in a related action brought by federal prosecutors in New Jersey.
By reaching a settlement with securities regulators, Hwang was banned from managing public money for at least five years. Regulators formally lifted the ban in 2020. But instead of managing money for outside investors, Hwang focused on managing money for himself and his family.