Archegos Capital Management founder Bill Hwang has been charged with fraud by US federal authorities.
Hwang, who was also the chief financial officer of the collapsed hedge fund, is expected to appear in court today along with his former sidekick, Patrick Halligan, charged with 11 criminal offences, including racketeering conspiracy, market manipulation and securities fraud.
The duo’s alleged crimes bumped up the apparent value of the investment firm’s holdings from US$1.5bn to US$35bn in one year, US attorney Damian Williams claimed.
The accusations centre around security-based swaps, derivative securities that are traded over the counter and therefore have limited regulatory disclosure requirements. Using these derivatives allowed Archegos to keep schtum about the size of its stake in particular companies.
“The accusation is that by hiding this exposure it left counterparties without an accurate view of how much exposure Archegos had to a security – which in some cases amounted to 70% of the issued share capital. This meant they were not suitably hedged to the synthetic positions. Counterparties were very often relying on Archegos to be truthful – which it clearly wasn’t,” explained Neil Wilson at markets.com.
Among those left in the lurch when Archegos Capital collapsed over a period of just four days were Credit Suisse, UBS, Morgan Stanley (NYSE:MS) and Nomura.
READ UBS and Nomura hit by heavy Archegos losses
Japanese bank Nomura took a US$2.3bn hit related to the Archegos crisis but that was reportedly dwarfed by Credit Suisse, which made a US$4.8bn provision against losses relating to the hedge fund’s demise, continuing the Swiss bank’s sorry tradition of not fully understanding its trading partners – it also lost a packet when Greensill Capital went belly-up last year.
Hwang is protesting his innocence. His strategy appears to have been based on building up massive positions in particular companies in order to force short sellers – investors who have borrowed stock and sold it in the hope of buying it back cheaper at a later date – to close their short positions.
The fund borrowed heavily to build up large holdings in high-profile companies such as internet search giant Baidu and entertainment conglomerate ViacomCBS (now renamed Paramount).
According to the Reuters news agency, the fund used nine different banks, thus disguising how highly-geared its position was; the news agency claims Archegos’s gearing level was as high as 1,000% at one point.
The hedge fund started to run into trouble when the share prices of two of its holdings, Baidu and luxury online retailer FarFetch, started to wane but the coup de grace was administered when a fundraising by Paramount was snubbed by the market and caused the share price to fall, prompting margin calls from Archegos’s lenders that, according to the Bloomberg news agency, made Archegos a forced seller of more than US$20bn of shares.
“We are extremely disappointed that the US attorney’s office has seen fit to indict a case that has absolutely no factual or legal basis; a prosecution of this type, for open-market transactions, is unprecedented and threatens all investors,” claimed Hwang’s attorney.
“As you will see when the facts unfold, Bill Hwang is entirely innocent of any wrongdoing; there is no evidence whatsoever that he committed any kind of crime, let alone the overblown allegations that pervade this indictment,” the legal eagles continued.
In a separate move, civil charges against Hwang and Halligan have been brought by the Securities and Exchange Commission (SEC).
The US regulator alleges that Archegos engaged in manipulative trading that affected multiple securities.
“We allege that Hwang and Archegos propped up a US$36bn 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,” said Gurbir Grewal, director of the SEC’s Division of Enforcement.
“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,” Grewal added.