Three years ago, a multibillion-dollar investment firm called Archegos Capital Management exploded without warning, causing major 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, will go on trial in federal court in Manhattan. If convicted, he could spend the rest of his life in prison.
Federal prosecutors are seeking a conviction in a major stock market manipulation case in which Mr. Hwang, whose real name is Sung Kook Hwang, was one of the big financial losers. Archegos had been managing 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. Also on trial with Mr. Hwang is Patrick Halligan, Archegos’ former chief financial officer.
Authorities said Archegos inflated the prices of the stocks it invested in by borrowing tens of billions of dollars from Wall Street banks to buy more and more shares. The rising stock prices encouraged other investors to buy and drove the prices even higher. At its peak, the strategy increased Mr. Hwang’s net worth to more than $35 billion, and the total value of the stocks Archegos owned was more than $100 billion.
Damian Williams, the U.S. attorney for the Southern District of New York in Manhattan, called Archegos’ plan to drive up stock prices “of historic proportions” when his office filed charges against Mr. Hwang in April 2022 and Mr. Halligan announced.
Barry Berke, a lawyer for Mr. Hwang, declined to comment. But at a court hearing a few months ago, Mr. Berke said his client “never sold a penny of his shares.”
Mary Mulligan, a lawyer for Mr. Halligan, said: “This is a case that should not have been filed.”
Archegos was little known before its collapse and was subject to little regulatory oversight because it did not manage money for outside investors. Still, the company operated like a large hedge fund, given the high level of risk it took and its outsized borrowings from banks – primarily through the use of sophisticated derivative contracts.
The company thrived whenever the prices of the stocks it purchased continued to rise. But Archegos, which Mr. Hwang named after the Greek word for leader or prince, apparently couldn’t handle a sudden downturn in the market. It collapsed when some of the stocks it had invested in lost value, prompting Wall Street banks to seize securities and demand that the company put up more money as collateral.
The impact of Archegos’ failure on the stock market was limited, but several banks suffered losses. Credit Suisse, which has since been taken over by UBS, lost $5.5 billion. UBS itself lost around $861 million by lending to Archegos. Last summer, UBS agreed to pay nearly $400 million to U.S. and U.K. regulators over Credit Suisse’s risk failures in the Archegos affair. Nomura and Morgan Stanley were among the banks that also lost money.
If convicted on all counts, Mr Hwang could theoretically be sentenced to 220 years in prison – although a more realistic sentence would be 20 years. By comparison, Samuel Bankman-Fried, the crypto entrepreneur who was sentenced in March to 25 years in federal prison for defrauding customers of $8 billion, faced 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 with the investigation.
Federal authorities said a critical component of the scheme involved Archegos officials misleading banks about the company’s overall presence in the market. Authorities also alleged that Mr. Hwang engaged in a “pump-and-practice scheme” – a strategy designed to significantly increase the company’s stock holdings and make Mr. Hwang appear to be an “extremely wealthy person.”
But prosecutors have yet to explain how Mr. Hwang planned to make profits by increasing Archegos’ stock prices. 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? To be a great. I think that’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 be “Don’t recognize the target.”
Prosecutors have said testimony about possible exit strategies for Mr. Hwang will be presented as part of the trial.
This is the second time that Mr. Hwang, a former hedge fund manager, has been accused of violating federal securities laws.
In 2012, he reached a civil settlement with the Securities and Exchange Commission in an insider trading investigation involving his old hedge fund Tiger Asia Management and was fined $44 million. Mr. Hwang was not criminally charged, but Tiger Asia pleaded guilty to federal insider trading charges in a related complaint filed by federal prosecutors in New Jersey.
In a settlement 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 money for outside investors, Mr. Hwang focused on managing money for himself and his family.
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2024-05-08 13:10:10
www.nytimes.com
