Archegos founder Bill Hwang indicted for fraud; chief risk officer pleads guilty

Bill Hwang was indicted in the Southern District of New York, along with former Archegos Chief Financial Officer Patrick Halligan. Chief Risk Officer Scott Becker pleaded guilty to charges of conspiracy to commit racketeering conspiracy, securities fraud, and wire fraud in relation to the alleged scheme, while head trader William Tomita also pleaded guilty to similar charges, plus market manipulation.

The four individuals also face charges announced by the Securities and Exchange Commission (SEC). The Commodity Futures Trading Commission (CFTC) charged Archegos and Halligan, Becker, and Tomita. Becker and Tomita each admitted their roles to the CFTC and agreed to cooperate with the agency.

Archegos collapsed in March 2021, resulting in significant losses for many of the firm’s largest lenders, most notably Credit Suisse.

The scheme: The SEC’s complaint alleged that, from at least March 2020 to March 2021, Hwang purchased on margin billions of dollars of total return swaps.

“As alleged, 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,” the SEC stated. “As a result of Hwang’s trading, Archegos allegedly underwent a period of rapid growth, increasing in value from approximately $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.”

One example specifically cited was Archegos’s position in ViacomCBS stock. At one point, Hwang effectively controlled more than 50 percent of the freely trading shares of ViacomCBS, which nobody outside Archegos knew about, according to the Department of Justice. How much the ViacomCBS position constituted Archegos’s capital was often misrepresented on calls with risk personnel from counterparties, according to the SEC, which noted the figure at more than 60 percent as of January 2021.

When ViacomCBS lost nearly half its value, Archegos’s risky bets backfired. The firm quickly collapsed, reportedly losing $8 billion over the course of two weeks in March 2021.

“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,” stated 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.”

Halligan and Becker were Archegos’s primary points of contact for the credit and risk review functions at its counterparties, according to the SEC. The agency cited a handful of situations when Becker allegedly misrepresented liquidity and capital positions to these counterparties, often claiming the firm’s largest position was only 35 percent of its then total capital.

“Today’s announcement demonstrates the department’s unwavering commitment to hold accountable individuals who distort and defraud our financial markets, including those who occupy the C-suite,” stated Deputy Attorney General Lisa Monaco. “That is especially true for this kind of crime—the kind that leaves a financial crater in its wake.”

The SEC’s complaint, filed in federal district court in Manhattan, charged Hwang and the other defendants with violating antifraud and other provisions of the federal securities laws. The complaint seeks permanent injunctive relief, return of allegedly ill-gotten gains, and civil penalties. The SEC also seeks to bar individual defendants from serving as a public company officer and director.

The CFTC’s complaint charged Archegos and Halligan with fraud. The agency is seeking restitution, disgorgement of ill-gotten gains, civil monetary penalties, permanent registration and trading bans, and permanent injunctions against further violations of the Commodity Exchange Act and other regulations.

The CFTC’s settled orders with Becker and Tomita found the two engaged in the scheme “to secure additional capacity for Archegos to enlarge its swap trading positions, to obtain or maintain favorable margin rates, and to attempt to satisfy margin calls.”

Becker and Tomita each entered into cooperation agreements with the CFTC’s Enforcement Division. The orders impose immediate cease-and-desist obligations against Becker and Tomita, the CFTC stated, and further sanctions will be determined in future proceedings.

As a “family office,” Archegos was exempt from reporting requirements from both the SEC and CFTC. Both agencies have explored whether to revisit the family office exemption in the aftermath of the firm’s collapse.