The alleged architect of a multibillion-dollar fraud that shook Wall Street heads to trial

The alleged architect of a multibillion-dollar fraud that shook Wall Street heads to trial
The alleged architect of a multibillion-dollar fraud that shook Wall Street heads to trial

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New York

In the spring of 2021, you might have heard about a small investment firm with an odd name, Archegos, that imploded practically overnight and left big Wall Street banks sweating over billions of dollars in losses. Then again, you might have been too busy scheduling your Covid vaccine and emerging from lockdown for the first time in a year, which is understandable.

Long story short, Archegos Capital Management built up huge bets that blew up in quasi-apocalyptic fashion, wiping out more than $100 billion in market value in the span of a few days.

And this week, just over two years after the firm collapsed, its 60-year-old founder and CEO, Bill Hwang, will stand trial on charges of 11 counts of racketeering, conspiracy and fraud in a lower Manhattan courtroom in proceedings that will have all of Wall Street watching.

There are a few reasons for that.

1. Bill Hwang is quite a character (more on that in a moment).

2. The Archegos collapsed Wall Street at a time when investors were drunk on cheap capital and enjoying an epic bull run thanks to the Fed’s unprecedented market interventions — an era of rock-bottom interest rates that many are eager to return to.

3. Advocates for market reform are holding up the Archegos collapse as a warning about the lack of regulation of so-called family offices — small private firms that the uber-wealthy set up to manage a person’s or family’s wealth.

Archegos (pronounced Ar-KHAY-gos) created a web of deceptive schemes to inflate the value of certain publicly traded stocks, including Viacom and Discovery (now called Warner Bros. Discovery, the parent company of CNN), according to the indictment.

Put simply, prosecutors say Hwang had used financial instruments called “total return swaps” to gain exposure to the stocks without actually owning them.

While that is a legal thing to do, it’s super risky and controversial. (Those who remember the blow-up of Long-Term Capital Management in 1998 know what I’m talking about.)

As one analyst told my colleague Matt Egan back in 2021: “Anytime a derivative is involved, you don’t really know how deep the tentacles go.”

Problem is, Hwang and his team allegedly lied to the banks they were borrowing from and used the swaps to conceal the huge positions they were building to evade government regulations.

That worked for a while. Over the course of a year, prosecutors say, Hwang grew his $1.5 billion portfolio into a $35 billion portfolio.

But when the prices of those stocks suddenly fell, Hwang found himself in big trouble. Banks demanded more collateral to cover the losses, and Hwang initially responded by trying to buy up more shares to reverse their slide.

It didn’t work, and the margin calls from banks kept coming in, ultimately forcing banks to liquidate the firm’s positions, further depressing stock prices, which left Archegos owing billions it didn’t have to banks that were left holding the bag. One of those banks was Credit Suisse, which took a $5.5 billion hit on its loans to Archegos, contributing to the lender’s downfall a year later.

In a single week, according to the indictment, Archegos’ collapse wiped out “more than $100 billion in apparent market value for nearly a dozen companies.” Notably, the fire sale wiped out more than half of the value of media giant Viacom.

The son of a Korean pastor, Bill Hwang is a devout Christian who isn’t shy about pushing his faith, even to his staff, according to a lawsuit filed by a former employee.

In the lawsuit, a former employee casts Hwang as presiding over a “toxic culture” that valued “employee submission and adulation.” Hwang allegedly urged his staff to devote more time to their faith and attend scripture readings. Employees were allegedly required to put at least 25% of their bonuses in the firm’s deferred compensation plan, which lost $500 million when Archegos collapsed.

The civil case is still in progress. Lawyers for Hwang didn’t immediately respond to a request for comment.

Even the name Archegos comes from the Greek word for “leader” and was used in the Bible to mean Jesus Christ.

A recent Bloomberg article described a massive piece of Hwang commissioned art, in which the blood of Christ washes over a gray New York City skyline, “cleansing the great metropolis of its sins.”

His criminal trial, begins which Wednesday, isn’t his first run-in with the law. In 2012, he pleaded guilty to wire fraud related to his Tiger Asia Management hedge fund, which had been exposed in an insider-trading scandal.

White-collar crime on Wall Street may seem like a distant problem for most Americans, and that may be true. But if you have any kind of retirement fund, then opaque market shenanigans matter. And sometimes, as in the financial crisis of 2008, it was a bit of Wall Street tinkering in derivatives contracts that blew up in banks’ faces and collapsed the housing market.

The Archegos charges suggest the DOJ is taking a harder line on fraud than it has in the past, holding Hwang and two of his associates personally accountable under criminal laws.

“The Archegos debacle did not occur in a vacuum,” said Dennis Kelleher, CEO of the nonprofit advocacy Better Markets, in a statement. “It was enabled by lax regulatory policies that have allowed excessive risk into our financial markets.”

Hwang has pleaded not guilty to 11 federal charges, each of which carries a maximum sentence of 20 years in prison.

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