The Securities and Exchange Commission has charged Bill Hwang, the owner of family office Archegos Capital Management, with orchestrating a fraudulent scheme that resulted in billions of dollars in losses. Several other key members of the operation are also being charged, including its chief financial officer and its head trader.
The SEC is alleging that from at least March 2020 to March 2021, Hwang purchased on margin billions of dollars of total return swaps. These security-based swaps allow investors to take on huge positions in equity securities of companies by posting limited funds up front.
What does the SEC reckon Hwang has done wrong?
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.
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.
The SEC’s complaint also alleges that, as part of the scheme, Archegos repeatedly and deliberately misled many of Archegos’ counterparties about Archegos’ exposure, concentration and liquidity, in order to get increased trading capacity so that Archegos could continue buying swaps in its most concentrated positions, thereby driving up the price of those stocks.
Ultimately in March 2021, price declines in Archegos’ most concentrated positions allegedly triggered significant margin calls that Archegos was unable to meet, and its subsequent default and collapse resulted in billions of dollars in credit losses among Archegos’ counterparties.
“Today, we charged Archegos Capital Management and affiliated individuals with committing fraud and manipulating stock prices using total return swaps,” said SEC Chair Gary Gensler. “The collapse of Archegos last spring demonstrated how activities by one firm can have far-reaching implications for investors and market participants.”
Gensler was at pains to point out the role service providers to Archegos could have played in helping to detect the fraud earlier. This includes the brokers that facilitated the trades.
$36 billion “house of cards”
The SEC is accusing Hwang of propping 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.
The so-called house of cards could only be sustained if that cycle of deceptive trading, lies and buying power continued uninterrupted, and once Archegos’ buying power was exhausted and stock prices fell, the entire structure collapsed, allegedly leaving Archegos’ counterparties billions in trading losses.
The SEC’s complaint, filed in federal district court in Manhattan, charges 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.
In parallel actions, the U.S. Attorney’s Office for the Southern District of New York today announced criminal charges for similar conduct, and the Commodity Futures Trading Commission (CFTC) announced civil charges. None of this looks good for Bill Hwang.
