The owner of Archegos Capital Management was arrested Wednesday on fraud and racketeering charges in connection with the dramatic collapse of the multibillion-dollar private equity firm last year.
The case marks one of the highest-profile criminal white-collar prosecutions in years. The scheme swelled the firm’s portfolio from $1.5 billon to $35 billion in a single year, according to investigators, and relied on extensive borrowing from Wall Street banks to finance big bets on a handful of stocks, including ViacomCBS, Discovery, and Chinese giants Tencent and Baidu.
Hwang and Halligan were arraigned Wednesday afternoon, and both pleaded not guilty to charges of racketeering conspiracy, securities fraud and wire fraud. Hwang will be released on $100 million bail, Bloomberg News reported.
Lawrence Lustberg, Hwang’s legal counsel, said his client had fully cooperated with the government’s investigation and was “entirely innocent” of any wrongdoing. “A prosecution of this type, for open-market transactions, is unprecedented and threatens all investors,” he said in a statement emailed to The Post.
Mary Mulligan, who represents Halligan, said in an email that he “is innocent and will be exonerated.”
Prosecutors also said that two former Archegos employees, William Tomita and Scott Becker, have pleaded guilty for their roles in the alleged conspiracy and are cooperating with authorities.
Archegos’s growth depended on a complex financial instrument known as “total return swaps,” which are contracts that allow investors to take positions in stocks or other assets for a minimal amount upfront in exchange for a fee. Swap holders stand to gain or lose based on the price of the underlying assets.
But some of those wagers went the wrong way, prompting Archegos’s lenders to ask to be repaid. When the firm couldn’t, some banks sold their positions, causing the stocks’ prices to fall even further. Archegos itself collapsed.
“These defendants and their co-conspirators lied to banks to obtain billions of dollars that they then used to inflate the stock price of a number of publicly-traded companies. The lies fed the inflation, and the inflation led to more lies,” said Damian Williams, the U.S. attorney for the Southern District of New York, in a news release.
Then the bubble burst and prices dropped, he said. “And when they did, billions of dollars of capital evaporated nearly overnight.”
Credit Suisse, Morgan Stanley and Nomura Holdings incurred a collective loss exceeding $10 billion after Archegos’s collapse, according to the Wall Street Journal reported.
“Hwang led market participants to believe that the prices of those stocks were the product of natural forces of supply and demand,” prosecutors said in the indictment, “when, in truth, they were the artificial product of Hwang’s manipulative trading and deceptive conduct that caused others to trade.”
Archegos was one of the largest hedge fund collapses since the 2008 financial crisis, sparking calls for tighter oversight of Wall Street from lawmakers including Democratic Sens. Sherrod Brown of Ohio and Elizabeth Warren of Massachusetts. It’s spurred scrutiny of what critics described as a lack of transparency tied to some trading contracts and to family offices, the private investment vehicles of wealthy individuals.
Cases against corporate executives are among the most complex the Justice Department takes on, Deputy Attorney General Lisa Monaco said Wednesday during a news conference.
“This case reaffirms that when executives commit crimes, those crimes and that conduct affect companies and ordinary citizens alike,” Monaco said, adding that “this kind of crime jeopardizes pensions, savings and jobs.”
The Securities and Exchange Commission also announced charges on Wednesday, alleging that Hwang, Halligan and two former Archegos traders ran a scheme that hinged on 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,” according to Gurbir S. Grewal, director of the SEC’s Division of Enforcement.
At its peak, Archegos had an exposure of $160 billion, the SEC alleges, putting it on par with some of the world’s biggest hedge funds.
“The house of cards could only be sustained if that cycle of deceptive trading, lies and buying power continued uninterrupted,” Grewal said in a statement. “Once Archegos’s buying power was exhausted and stock prices fell, the entire structure collapsed, allegedly leaving Archegos’s counterparties billions in trading losses.”
Hwang, a veteran investor, has come under SEC scrutiny before. In 2012, the regulator accused him and his former fund, Tiger Asia, with insider trading and market manipulation. Hwang and Tiger Asia later agreed to pay $44 million to settle the SEC charges.
After the investigation, Hwang turned Tiger Asia into a family fund, Archegos.
Hwang, 58, also poured his fortune into evangelical philanthropy. Using Archegos’s same Manhattan address across from Carnegie Hall, Hwang co-founded one of the nation’s largest Christian charitable foundations, the Grace and Mercy Foundation, with more than $580 million in net assets, according to the most recent tax documents available.
Tax records show Hwang’s charity has supported more than 60 institutions, mostly evangelical ones. The donations range from five to seven figures, including $1.2 million to the Museum of the Bible in Washington.