Three years ago, a multibillion-dollar investment firm called Archegos Capital Management exploded without warning, causing major losses for some Wall Street banks and leading to federal criminal charges against the company's founder, Bill Hwang.
On Wednesday, Mr. Hwang, 60, was charged with 11 cases of securities fraud, wire fraud, conspiracy, racketeering and market manipulation will appear in Manhattan federal court. If convicted, he could spend the rest of his life in prison.
Federal prosecutors are trying to secure a conviction in a major stock market manipulation case in which Mr. Hwang, whose legal name is Sung Kook Hwang, was one of the big financial losers. Archegos had managed the money mainly for Mr Hwang, his family and some of his employees, and much of his family's wealth was lost when the company collapsed in March 2021. Patrick Halligan, the former chief financial officer, is also on trial before Mr Hwang. officer of Archegos.
That's what the authorities said Archegos has inflated stock prices it invested in it by using tens of billions of borrowed dollars from Wall Street banks to keep buying more and more shares. Rising stock prices encouraged other investors to buy, driving prices even higher. At its peak, the strategy increased Mr. Hwang to more than $35 billion, and the total value of the shares Archegos owned exceeded $100 billion.
Damian Williams, the U.S. attorney for the Southern District of New York in Manhattan, called Archegos' plan to drive up stock prices “historical in naturewhen his office announced in April 2022 that charges had been filed against Mr. Hwang and Mr. Halligan.
Barry Berke, a lawyer for Mr. Hwang, declined to comment. But at a court hearing a few months ago, Mr. Berke said his client “never sold a nickel of his stock.”
Mary Mulligan, lawyer for Mr Halligan, said: “This is a case that should not have been brought.”
Archegos was little known before its collapse and was not subject to much regulatory scrutiny because it did not manage money for outside investors. Yet it operated like a large hedge fund, given the level of risk it took on and the excessive borrowing from banks – mainly through the use of sophisticated derivative contracts.
The company prospered when the prices of the shares it bought continued to rise. But Archegos, which Mr. Hwang named after the Greek word for leader or prince, apparently couldn't handle a sudden downturn in the market. It collapsed when some of the stocks it had invested in fell in value, prompting Wall Street banks to seize securities and demand the company put up more money as collateral.
The impact of Archegos' bankruptcy on the stock market was limited, but several banks suffered losses. Credit Suisse, which has now acquired UBS, lost $5.5 billion. UBS itself lost about $861 million on loans to Archegos. Last summer, UBS agreed to pay nearly $400 million to regulators in the United States and Britain over Credit Suisse's risky failures in the Archegos affair. Nomura and Morgan Stanley were among the banks that also lost money.
If convicted on all counts, Mr Hwang could theoretically be sentenced to 220 years in prison – although a 20-year sentence is more realistic. For comparison: Samuel Bankman-Fried, the crypto entrepreneur who was was sentenced to 25 years in prison in March for defrauding customers of $8 billion, faced a maximum sentence of 110 years.
The trial begins Wednesday with jury selection. Prosecutors plan to call as witnesses two former Archegos employees who have pleaded guilty and agreed to cooperate with the investigation.
Federal authorities said a key part of the scheme involved Archegos officials misleading banks about the company's overall footprint in the market. The authorities also alleged that Mr. Hwang engaged in a “pump and brag scheme” – a strategy designed to substantially increase the company's stock holdings and give Mr. person”.
But prosecutors have yet to explain how Mr. Hwang planned to make a profit by inflating the prices of the shares Archegos owned. Even the federal judge who will preside over the trial said he was baffled by Mr. Hwang's strategy of simply buying more and more shares.
“What did he want? What did he want to achieve? To be a major player. I suppose that's possible, but it doesn't seem to me that that was his goal,” Judge Alvin Hellerstein said at a hearing last year. “I don't understand his goal .'
Prosecutors have said the trial will include testimony about possible exit strategies for Mr. Hwang.
This is the second time Mr. Hwang, a former hedge fund manager, has been accused of violating federal securities laws.
In 2012, he reached a civil settlement with the Securities and Exchange Commission in an insider trading investigation involving his old hedge fund – Tiger Asia Management – and was fined. $44 million. Mr Hwang was not criminally charged, but Tiger Asia was pleaded guilty to federal insider trading charges in a related action brought by federal prosecutors in New Jersey.
By reaching a settlement with securities regulators, Mr. Hwang was barred from managing public money for at least five years. Supervisors formally lifted the ban in 2020. But instead of managing money for outside investors, Mr. Hwang focused on managing money for himself and his family.