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Archegos founder Bill Hwang and CFO charged with securities fraud




Archego’s Capital Management founder Bill Hwang and CFO Patrick Halligan have been charged with securities fraud, bank fraud and extortion, federal prosecutors in Manhattan said Wednesday.

Prosecutors allege that the men participated in related schemes to illegally manipulate stock prices and to defraud leading global investment banks and brokerages.

They claimed that Mr. Hwang’s fraud pumped Archegos’ portfolio from $ 1.5 billion to $ 35 billion in one year, ending in March 2021 – and inflated the market size from $ 10 billion to $ 160 billion in that period, including loans from Wall Street companies.

Federal prosecutors are expected to announce the allegations at a morning press conference.

The indictment alleges that Messrs. Hwang, Halligan and others used Archegos to maintain two interrelated criminal schemes that harmed market participants and Archegos employees and burdened lenders with billions in losses.

First, Mr. Hwang worked to defraud market participants by manipulating the market for some securities in Archegos̵[ads1]7; portfolio, and then he led market participants to believe that the resulting stock prices were a result of supply and demand, rather than his deceptive behavior, prosecutors said. .

“The defendants and their accomplices used Archegos, a family office that invested Hwang’s personal fortune, as an instrument of market manipulation and fraud, with far-reaching consequences,” the indictment states. More than $ 100 billion in market value for more than a dozen companies disappeared within days, according to the indictment.

A lawyer for Mr Hwang said his client was “completely innocent” and that there was “no evidence whatsoever that he had committed any crime”. An attorney for Mr. Halligan said her client is “innocent and will be acquitted.”

The Securities and Exchange Commission sued Hwang and Halligan in a separate civil fraud lawsuit, as well as William Tomita, Archegos’ chief negotiator, and Scott Becker, its chief risk officer. Attorneys for Messrs. Tomita and Becker did not immediately respond to a request for comment.

Archegos collapsed in March 2021, and relaxation sent shock waves through Wall Street. Banks tried to liquidate positions related to Archegos, quickly shaved tens of billions of market value of large companies and, once the dust had settled, distributed more than $ 10 billion in losses to counterparties including Credit Suisse Group AG

Morgan Stanley and Nomura Holdings Inc.

At Archegos, Mr. Hwang built up large, concentrated positions in companies and held some positions in a mix of cash and swap deals with money borrowed from banks across Wall Street. Mr. Hwang favored total return swaps that gave Archegos profits and losses on the shares that formed the basis of the swaps while lenders held the securities.

Their use enables investors to maintain their anonymity and avoid disclosure requirements above a certain ownership limit because they do not technically own the shares.

As shares owned by Archegos rose, Hwang increased to its best results, often using swaps.

Prosecutors said Archegos would typically buy shares until they owned about 5% of the company’s outstanding shares, and that Mr. Hwang demanded additional exposure through total return swaps.

Mr. Halligan, Tomita, Becker, and others, with Mr. Hwang’s blessing, repeatedly made significantly false and misleading statements about Archegos’ portfolio to the firm’s counterparts across Wall Street in an attempt to get them to trade with, give credit to and hide the grave. risk of doing business with Archegos, the prosecution claimed.

Archegos tried to dominate the market for its top stocks, according to the SEC, and placed ever higher priced orders throughout the trading days to bid up prices. It also engaged in manipulative trading at the end of the day, in an attempt to increase the closing price of the securities it owned, according to the SEC.

Its trading in some securities sometimes exceeded 40% of the total daily trading volume of these shares, the SEC said.

US-listed Chinese companies were among Archego’s largest positions, and manipulated shares included ViacomCBS Inc.,

Discovery Inc., now known as Warner Bros. Discovery Inc.,

GSX Techedu Inc.,

now known as Gaotu Techedu Inc., China’s Internet search giant Baidu Inc.

and the luxury online retailer Farfetch Ltd.

according to the indictment.

How Archegos roared the markets

At the end of March 2021, the indictment said, Archegos held positions worth more than $ 10 billion in GSX, Baidu and Tencent Music Entertainment Group,

and more than $ 20 billion in ViacomCBS.

Archegos owned more than 50% of ViacomCBS’s outstanding shares, the SEC said.

In a text message exchange with an analyst in June 2020, Hwang said that a recent rise in ViacomCBS ‘share price was “a sign that I bought”, followed by a “tears of joy” emoji, according to the SEC’s complaint.

The SEC said ViacomCBS shares rose around 150% in three months, during a period when Archegos aggressively bought shares and swaps.

But the dynamics that favored Mr. Hwang had changed by March 2021, when his strategy had made Archegos “very vulnerable” to volatility in a small number of stocks. Already pressured by increasing losses in companies including Baidu and Farfetch, the announcement of additional financing from ViacomCBS at the end of March sent the share price to fall and effectively triggered the dissolution of Archegos.

Instead of selling positions to meet margin calls from lenders, prosecutors say, Hwang’s traders said they were “engaging in a desperate buying spree in an attempt to reverse the fall in equities underlying Archegos’ core positions”. But the effort could not stop the bleeding.

Write to Corinne Ramey at Corinne.Ramey@wsj.com, Susan Pulliam at susan.pulliam@wsj.com and Juliet Chung at juliet.chung@wsj.com

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