UNITED STATES OF AMERICA, NEW YORK The owner of a New York hedge fund that went bankrupt after defaulting on margin calls was arrested on allegations of defrauding major global investment banks and brokerages of billions of dollars on Wednesday.
Bill Hwang, the founder of Archegos Capital Management, and Patrick Halligan, his former top financial officer, were charged in a federal indictment unsealed in Manhattan federal court. Prosecutors claim that Hwang lied to banks and brokerage firms in order to increase his private investment firm’s portfolio from $10 billion to $160 billion.
At their arraignment, both men pleaded not guilty to counts of racketeering conspiracy and fraud. Hwang was released after posting a $100 million bond, while Halligan was released after posting a $1 million bond.
The fraud “almost imperilled our financial system,” said U.S. Attorney Damian Williams at a press conference.
“However, the music came to a halt last year.” The sphere of influence has deflated. Prices began to fall. And when they did, billions of dollars in capital vanished very instantly,” he added.
Archegos’ head trader Scott Becker, 38, of Goshen, New York, and the firm’s top risk officer William Tomita, 38, of Greenwich, Connecticut, pled guilty last week and are cooperating with the government, according to Williams.
The defendants allegedly misled to banks in order to get billions of dollars, which they then used to boost the stock price of publicly traded companies, according to the prosecution.
“The lies fueled inflation, which in turn fueled further lies,” he explained. “It went on and on.”
Hwang and his firm allegedly had over 50% of ViacomCBS shares at one point, according to Williams.
According to the indictment, Hwang, 58, of Tenafly, New Jersey, committed the fraud from March 2020 to March 2021 by first investing his personal fortune, which grew from $1.5 billion to over $35 billion, and then borrowing money from major banks and brokerages, which grew from about $10 billion to over $160 billion.
According to the report, he concealed the scope of his market skill from investors by employing derivative instruments with no necessity for public disclosure.
“As a result, the investing public was unaware that Archegos had grown to dominate the trading and stock ownership of many companies,” according to the indictment.
The risky moves exposed the firm’s portfolio to price swings in a few equities, resulting in a flurry of margin calls in late March 2021 that had a catastrophic domino effect. The indictment claims that Archegos defrauded over a dozen companies, causing over $100 billion in market value to vanish in days, and that banks and prime brokers misled by Archegos lost billions.
Innocent Archegos employees who were compelled to allocate a significant portion of their pay to the firm as deferred compensation also lost millions of dollars, according to the lawsuit.
The Securities and Exchange Commission has initiated separate civil allegations against Hwang and Halligan, 45, of Syosset.
“The collapse of Archegos last spring illustrated how one firm’s operations can have far-reaching ramifications for investors and market participants,” said SEC Chairman Gary Gensler in a statement.
“We allege that Hwang and Archegos kept a $36 billion house of cards afloat by engaging in a never-ending cycle of manipulative trading, lying to banks to obtain additional capacity, and then using that capacity to engage in even more manipulative trading,” said Gurbir S. Grewal, director of the SEC’s Division of Enforcement.
“However, the house of cards could only be sustained if that cycle of deceptive trading, lies, and buying power continued unabated, and once Archegos’ buying power was depleted and stock prices fell, the entire structure collapsed, allegedly leaving Archegos’ counterparties billions in trading losses,” Grewal explained.
Lawrence Lustberg, Hwang’s lawyer, expressed his dissatisfaction with a prosecution that he believes has “absolutely no factual or legal basis.”
“A prosecution of this nature for open-market transactions is unprecedented and poses a threat to all investors,” he wrote in a statement. “As the facts emerge, Bill Hwang is completely innocent of any wrongdoing; there is no evidence that he committed any crime, let alone the wildly exaggerated claims that abound in this indictment.”
Even though Hwang “had made himself available and completely cooperated with the Government’s inquiry,” Lustberg said it was sad that he was arrested without warning.
“We strenuously oppose the charges as a matter of law and fact and are certain that we will succeed in Court,” he said. “However, an arrest was not necessary in this case, in the midst of an investigation that has lasted more than a year and appears to be ongoing.”
“Pat Halligan is innocent and will be exonerated,” said attorney Mary Mulligan, who represents Halligan.