Monday May 13, 2024
The trial of Archegos Capital Management founder Bill Hwang began Monday with prosecutors telling a federal jury that the former fund manager manipulated markets and defrauded banks in the lead-up to the meltdown of his firm.
“Bill Hwang was a billionaire, but he risked nearly everything because he wanted more,” Assistant U.S. Attorney Alexandra Rothman said in a Manhattan courtroom. Archegos, she said, was a “house of cards built on manipulation and lies.”
Hwang’s firm used borrowed money and financial derivatives to trade heavily in a handful of tech and media stocks and help amplify its market footprint from about $10 billion to more than $160 billion over a yearlong period beginning in March 2020.
Then, the share prices of some of Archegos’s biggest holdings began to falter, prompting a cycle of margin calls and stock sales that vaporized over $100 billion in market value within a few days.
Prosecutors charged Hwang and Archegos’s former chief financial officer, Patrick Halligan, with racketeering conspiracy and securities fraud. They have pleaded not guilty. Each defendant faces a lengthy prison term if convicted. Two other former Archegos executives have already pleaded guilty and are cooperating with the prosecution.
The demise of Archegos scorched Wall Street, with a group of banks losing more $10 billion from their exposure. As a result, regulators stepped up their oversight of how banks manage risks with their fund clients. UBS agreed to pay nearly $400 million in fines over risky dealings with Archegos at Credit Suisse, which was eventually sold to its Swiss rival after sustaining damage from Archegos.
Archegos’s trades in companies including ViacomCBS, now known as Paramount Global, were timed and sized to maximize their market impact, prosecutors said. The firm used swaps to avoid disclosing the total size of positions, and to cause its lenders to buy additional shares as a hedge. At one point, Archegos had invested more than $30 billion into a single company using swaps, Rothman said, with $1 billion in purchases happening in one day to try to prevent a selloff.
Prosecutors argued Hwang’s motivations were a mix of greed and egoism. In court filings, they have said Hwang compared himself to Warren Buffett and Jeff Bezos at company meetings and strove to amass a fortune of $50 billion or more.
“Bill Hwang wanted to be a legend of Wall Street,” Rothman said. “He manipulated the stock prices to make himself a legend.”
Hwang’s attorneys have argued that Archegos’s trading practices and use of swaps were lawful and didn’t amount to manipulation. It was long Hwang’s style to invest in a small, concentrated number of stocks, his attorney, Barry Berke, told jurors Monday.
Hwang thought ViacomCBS and other holdings were poised to benefit from the pandemic-induced boom in video-streaming and other digital technologies and believed they resembled successful investments he made in the past, such as Netflix.
“He put his money where his mouth is, and he didn’t take it out,” Berke said. Archegos mainly managed Hwang’s personal wealth, so he bore most of the losses when Archegos blew up.
To boost buying power, Hwang directed deputies to obtain more financing from banks by misleading them about the composition and riskiness of Archegos’s portfolio, prosecutors allege. A former executive on UBS’s risk team testified that Archegos repeatedly sought and received increases in its borrowing limit at the bank, including a request to raise it to $12 billion in March 2021, while sharing few details about its leverage and trading at other banks.
An Archegos executive told UBS at that time that its largest position represented about 35% of the firm’s capital, a manageable risk from the bank’s perspective. Prosecutors asked the former UBS executive, Brian Fairbanks, what he would have done had he known Archegos’s largest position actually represented 75% of its capital.
e probably would’ve hit the panic button,” Fairbanks said on the witness stand.
Archegos tried to keep information about its positions from leaking into the market to ensure banks couldn’t front-run the firm, Berke said. The meme-stock stock era of early 2021, when individual investors caused losses at some hedge funds by buying shares of GameStop and other companies en masse, made Hwang value discretion even more, Berke said.
An attorney for Halligan, Mary Mulligan, told jurors that Archegos’s performance was always volatile and that banks were eager to trade with the firm because of the fees they earned extending loans and swaps.
“The people blinded by money were the counterparties that wanted Archegos’s business,” Mulligan said.
The trial may take as long as eight weeks.
Write to Peter Rudegeair at peter.rudegeair@wsj.com
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Appeared in the May 14, 2024, print edition as 'Archegos Was a ‘House of Cards,’ Jury Told'.
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