Three years ago, a multibillion-dollar investment firm called Archegos Capital Management exploded without warning, causing heavy losses for some Wall Street banks and leading to federal criminal charges against the company’s founder, Bill Hwang.
On Wednesday, Mr. Hwang, 60, who has been charged with 11 counts of securities fraud, wire fraud, conspiracy, racketeering and market manipulation, is scheduled to stand trial in Manhattan federal court. If convicted, he could spend the rest of his life in prison.
Federal prosecutors are seeking a conviction in a major stock manipulation case in which Mr. Hwang, whose legal name is Sung Kook Hwang, was a major financial loser. Archegos had managed money primarily for Mr. Hwang, his family and some of his employees, and much of his family’s wealth was wiped out when the company collapsed in March 2021. Patrick Halligan, the former financial director, is also on trial with Mr. Hwang. officer of Archegos.
Authorities said Archegos inflated the prices of stocks it invested in by using tens of billions of dollars borrowed from Wall Street banks to keep buying more and more shares. The surge in stock prices encouraged other investors to buy, pushing prices even higher. At its peak, the strategy increased Mr. Hwang’s net worth to more than $35 billion, and the overall value of shares held by Archegos was more than $100 billion.
Damian Williams, the U.S. attorney for the Southern District of New York in Manhattan, called Archegos’ scheme to raise stock prices “historic in scale” when his office announced the filing of charges against Mr. Hwang and Mr. Halligan in April 2022.
Barry Berke, Mr. Hwang’s lawyer, declined to comment. But at a court hearing a few months ago, Mr Berke said his client “never sold a penny of his stock”.
Mary Mulligan, Mr Halligan’s lawyer, said: “This is a case which should not have been brought. »
Archegos was little known before its collapse and was not subject to much regulatory oversight because it did not manage money for outside investors. Yet it operated as a large hedge fund given the level of risk it took and its outsized borrowings from banks – primarily through the use of sophisticated derivative contracts.
The company prospered whenever the prices of the stocks it purchased kept rising. But Archegos, which Mr. Hwang named after the Greek word for leader or prince, apparently did not seem able to handle a sudden market drop. The company collapsed when the value of some of the stocks it had invested in fell, prompting Wall Street banks to seize securities and demand that the company put up more money as collateral.
The impact of the Archegos bankruptcy on the stock market was limited, but several banks suffered losses. Credit Suisse, since taken over by UBS, lost $5.5 billion. UBS itself lost around $861 million lending to Archegos. Last summer, UBS agreed to pay nearly $400 million to U.S. and British regulators over the Credit Suisse bankruptcies in the Archegos affair. Nomura and Morgan Stanley were also among the banks that also lost money.
If convicted on all counts, Mr. Hwang could, in theory, 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 sentenced in March to 25 years in federal prison for defrauding customers out of $8 billion, faces a maximum sentence of 110 years.
The trial begins Wednesday with jury selection. Prosecutors plan to call as witnesses two former Archegos employees who pleaded guilty and agreed to cooperate in the investigation.
Federal authorities said a key part of the scheme involved Archegos officials misleading banks about the company’s overall market footprint. Authorities also claimed that Mr. Hwang engaged in a “pump and brag strategy” — a strategy designed to dramatically increase the company’s stock and make Mr. Hwang appear to be an “extremely wealthy person.” .
But prosecutors have yet to explain how Mr. Hwang planned to profit from the rising prices of shares held by Archegos. 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? Be a big shot. I suppose it’s possible, but it doesn’t seem to me that that was his goal,” Judge Alvin Hellerstein said at a hearing last year. “I can’t understand its purpose.”
Prosecutors said testimony about Mr. Hwang’s potential exit strategies would be produced during the trial.
This is the second time Mr. Hwang, a former hedge fund manager, has been charged with violating federal securities laws.
In 2012, he reached a civil settlement with the Securities and Exchange Commission in an insider trading investigation involving his former hedge fund – Tiger Asia Management – and was fined 44 million dollars. Mr. Hwang has not been criminally charged, but Tiger Asia pleaded guilty to federal insider trading charges in a related action brought by federal prosecutors in New Jersey.
By reaching a deal with securities regulators, Mr. Hwang was banned from managing public funds for at least five years. Regulators officially lifted the ban in 2020. But instead of managing outside investors’ money, Mr. Hwang focused on managing his and his family’s money.
News Source : www.nytimes.com
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