Founder of Archegos charged with fraud, chief risk officer has pleaded guilty

Archegos Capital Management's founder was arrested on Wednesday and charged with racketeering conspiracy, securities fraud, and wire fraud in connection with a multibillion-dollar market manipulation scheme that led to the collapse of the U.S. hedge fund.

Bill Hwang and Archegos Chief Financial Officer Patrick Halligan were indicted in the Southern District of New York. In connection with the alleged scheme, Chief Risk Officer Scott Becker pleaded guilty to charges of racketeering conspiracy, securities fraud, and wire fraud, while head trader William Tomita pleaded guilty to similar charges, as well as market manipulation.

The Securities and Exchange Commission has also filed charges against the four people (SEC). Archegos, Halligan, Becker, and Tomita were all charged by the Commodity Futures Trading Commission (CFTC). Becker and Tomita both admitted their wrongdoings to the CFTC and agreed to work with them.

Many of Archegos' largest lenders, including Credit Suisse, suffered significant losses when the company collapsed in March 2021.

According to the SEC's complaint, Hwang purchased billions of dollars in total return swaps on margin from at least March 2020 to March 2021.

According to the SEC, "Hwang frequently entered into certain of these swaps without any economic purpose other than to artificially and dramatically drive up the prices of the various companies’ securities, which induced other investors to purchase those securities at inflated prices. As a result of Hwang’s trading, Archegos allegedly underwent a period of rapid growth, increasing in value from approximately $1.5 billion with $10 billion in exposure in March 2020 to a value of more than $36 billion with $160 billion in exposure at its peak in March 2021. "

Archegos' stock holdings in ViacomCBS were cited as an example. According to the Department of Justice, at one point, Hwang effectively controlled more than 50% of ViacomCBS' freely trading shares, which no one outside Archegos was aware of. According to the SEC, how much the ViacomCBS position constituted Archegos' capital was frequently misrepresented on calls with counterparty risk personnel, with the figure at more than 60% as of January 2021.

Archegos' risky bets backfired when ViacomCBS lost nearly half of its value. The company quickly went bankrupt, reportedly losing $8 billion in two weeks in March 2021.

"We allege that Hwang and Archegos 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. But the house of cards could only be sustained if that cycle of deceptive trading, lies, and buying power continued uninterrupted, and once Archegos’s buying power was exhausted and stock prices fell, the entire structure collapsed, allegedly leaving Archegos’s counterparties billions in trading losses," said Gurbir Grewal, director of the Securities and Exchange Commission's Division of Enforcement.

According to the SEC, Halligan and Becker were Archegos' primary points of contact for credit and risk review functions at its counterparties. Becker allegedly misrepresented liquidity and capital positions to these counterparties in a number of instances, according to the agency, claiming that the firm's largest position was only 35 percent of its total capital at the time.

Deputy Attorney General Lisa Monaco stated, "Today’s announcement demonstrates the department’s unwavering commitment to hold accountable individuals who distort and defraud our financial markets, including those who occupy the C-suite. That is especially true for this kind of crime—the kind that leaves a financial crater in its wake."

Hwang and the other defendants were charged by the SEC in a complaint filed in federal district court in Manhattan with violating antifraud and other provisions of the federal securities laws. Permanent injunctive relief, the return of allegedly ill-gotten gains, and civil penalties are all sought in the complaint. Individual defendants may also be barred from serving as officers and directors of public companies, according to the SEC.

Archegos and Halligan were charged with fraud by the CFTC. Restitution, disgorgement of ill-gotten gains, civil monetary penalties, permanent registration and trading bans, and permanent injunctions against future violations of the Commodity Exchange Act and other regulations are among the demands made by the agency.

Becker and Tomita were found to be involved in the scheme "to secure additional capacity for Archegos to enlarge its swap trading positions, to obtain or maintain favorable margin rates, and to attempt to satisfy margin calls," according to the CFTC's settled orders.

Becker and Tomita both agreed to cooperate with the CFTC's Enforcement Division. According to the CFTC, the orders impose immediate cease-and-desist obligations on Becker and Tomita, with further sanctions to be determined in future proceedings.

Archegos was exempt from both the SEC and the CFTC's reporting requirements as a "family office." In the wake of the firm's demise, both agencies have looked into revisiting the family office exemption.

By fLEXI tEAM