Archegos founder arrested for ‘massive market manipulation’

Bill Hwang and other executives have been arrested and charged by federal officers for their roles in a “fraudulent scheme” that created a “$36 billion house of cards”.  

The US Securities and Exchange Commission (SEC) has accused the controversial founder of collapsed family office Archegos Capital Management with orchestrating a “fraudulent scheme” that resulted in billions of dollars of losses.  

Hwang was arrested at his home today (Wednesday 27 April) on multiple charges. His former right-hand man and Archegos chief financial officer Patrick Halligan was also arrested, along with other senior executives of the firm including head trader William Tomita and chief risk officer Scott Becker.  

The SEC complaint, filed in a federal district court in Manhattan, charges Hwang and the other defendants (along with Archegos itself) with committing fraud and manipulating stock prices, as well as violating other provisions of the federal securities laws. In parallel actions the US Attorney’s Office for the Southern District of New York also announced criminal charges for similar conduct, while the Commodity Futures Trading Commission (CFTC) is pursuing civil charges.  

The SEC alleges that from at least March 2020 to 2021, Hwang purchased billions of dollars of total return swaps on margin. These security-based swaps allowed investors to take on huge positions in equity securities of companies by posting limited funds up front.  

“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,” said the SEC in a statement released today.  

As a result of this trading, Archegos ballooned in size, increasing in value from around $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. 

To continue growing, and otherwise maintain the gains it had achieved through its ramp-up of exposures, Archegos needed to ensure that first, the value of those exposures would continue to appreciate, and second, its counterparties would continue to extend credit margin and trading capacity necessary for Archegos to enter into even more security-based swaps. 

“To attempt to overcome this predicament, Archegos chose not to rely on ordinary market forces,” claims the complaint document filed by the SEC.  

“Instead, from at least September 2020 through March 2021, Archegos engaged in a brazen scheme to manipulate the market for the securities of the issuers that represented Archegos’s top 10 holdings, both through purchases of the issuers’ securities and entry into security-based swaps referencing those issuers.  

The court filing claims that Archegos, through Hwang and Tomita, effected the scheme by dominating the market for its top 10 holdings, as well as by “setting the tone” (i.e., engaging in large pre-market trading), bidding up prices by entering incrementally higher limit orders throughout the trading day, and “marking the close” (i.e., engaging in large trading in the last 30 minutes of the trading day), with the specific goal of artificially inflating the share prices of its top 10 holdings. 

“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,” 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 [including leading Wall Street banks such as UBS, Credit Suisse, Nomura and Morgan Stanley] with billions in trading losses.” 

The SEC complaint seeks permanent injunctive relief, the return of “allegedly ill-gotten gains”, and civil penalties. The SEC also wants to bar the individual defendants (Hwang, Halligan, Tomita and Becker) from ever serving again as public company officers or directors. 

“The collapse of Archegos last spring demonstrated how activities by one firm can have far-reaching implications for investors and market participants,” said SEC chairman Gary Gensler. “The failure of Archegos underscores the importance of our ongoing work to update the security-based swaps market to enhance the investor protections, integrity, and transparency of this market.” 

The arrests serve as a warning to the wider market, a point also highlighted by Gensler, who stressed that: “I encourage prime brokers and other market participants to remain vigilant to the risks presented by counterparty relationships.”