Archegos' spectacular collapse culminates in criminal charges for founder Bill Hwang

If convicted of all charges, Bill Hwang faces as many as 380 years in prison. PHOTO: REUTERS

NEW YORK (BLOOMBERG) - Bill Hwang, the enigmatic investor behind one of the most spectacular trading debacles in Wall Street history, was arrested on Wednesday (April 27) over what federal prosecutors characterised as a vast, criminal scheme to mislead banks and manipulate markets.

A year after the collapse of Hwang's private investment firm, Archegos Capital Management, sent shock waves through global finance, prosecutors provided their first full account of what happened inside the firm - and new details about the scale of Hwang's trading and the origins of his strategy.

Hwang was charged with fraud, and Patrick Halligan, the chief financial officer of Archegos, was also arrested and charged with fraud. If convicted of all charges, Hwang faces as many as 380 years in prison. Both men pleaded not guilty in a lower Manhattan courtroom Wednesday and were released on bail.

The collapse of Archegos - Hwang's family office that was virtually unknown even on Wall Street - exposed gaping holes in how major banks manage their risks, as well as in how regulators oversee Wall Street. A year on, Credit Suisse, among others, is still coping with the fallout. Hwang's spectacular gains and losses extended to well-known stocks such as entertainment giant ViacomCBS.

The two men were charged with 11 criminal counts, including racketeering conspiracy, market manipulation, wire fraud and securities fraud, according to an indictment unsealed on Wednesday. The United States Securities and Exchange Commission and the Commodity Futures Trading Commission filed related civil complaints as well.

Some of the allegations made by prosecutors have been known since Archegos's implosion, such as Hwang's use of swaps to keep the fund's stock positions below 5 per cent to avoid triggering required disclosures, and his misleading banks about his portfolio composition and the specific stocks he wagered on.

But the authorities on Wednesday revealed the extent of the fraud: Hwang allegedly inflated the value of his portfolio from US$1.5 billion (S$2.1 billion) to more than US$35 billion in one year, and brought the total size of Archegos's market positions - including borrowed money - to a whopping US$160 billion at its peak.

"The scale of the trading was stunning," Mr Damian Williams, the US attorney for the Southern District of New York, told reporters on Wednesday. "This was not business as usual or some sophisticated strategy - it was fraud."

The documents also reveal a shift in Hwang's investment process that began after his move to remote work with the Covid-19 pandemic, spending more time communicating with traders than analysts.

Prosecutors also allege that Hwang coordinated certain trades with a close friend and former colleague at an unnamed hedge fund to maximise his market impact. The fund manager, identified only as "Adviser-1", is Teng Yue Partners head Tao Li. Teng Yue and the acolyte of Hwang have not been accused of wrongdoing, and the firm did not respond to messages seeking comment.

Hwang appeared in court on Wednesday afternoon to enter his not-guilty plea. He agreed to pay US$5 million in cash and pledged two properties to secure a US$100 million bond, while Halligan agreed to US$1 million bail. Both men agreed to restrict their travel.

The indictment said Archegos' positions were inflated with the use of borrowed money and derivative securities that required no public reporting. When the market turned against the positions in March 2021, Hwang directed the fund's traders to go on a buying spree in an attempt to prop up their price, federal prosecutors charged.

Archegos imploded after amassing a concentrated portfolio of stocks by using borrowed money. It collapsed after some of the shares tumbled, triggering margin calls from banks, which then dumped Hwang's holdings.

Major global banks lost more than US$10 billion, prompting the departures of several senior executives and probes into the way firms monitor the risks run by their businesses serving hedge funds.

Fortunes diverged among the firms that Archegos dealt with: Credit Suisse, Nomura Holdings and Morgan Stanley incurred some of the steepest losses. Others, including Goldman Sachs, Wells Fargo and Deutsche Bank, escaped relatively unscathed.

Join ST's Telegram channel and get the latest breaking news delivered to you.