MANHATTAN (CN) — The founder of Archegos Capital Management was indicted on fraud charges Wednesday, a little over a year after his company's implosion caused billions of dollars of losses on Wall Street.
“The scale of the trading was stunning,” U.S. Attorney Damian Williams for the Southern District of New York said at a press conference this morning, announcing the arrest of Sung Kook "Bill" Hwang and Patrick Halligan, who served as the founder and chief financial officer, respectively of Archegos.
“This was not business as usual or some sophisticated strategy — it was fraud," Williams continued.
Hwang, 58, and Halligan, 45, are both charged with conspiracy to violate federal anti-racketeering law, securities fraud and wire fraud in relation to an alleged scheme to manipulate public stocks.
Prosecutors allege that they propped up the value of Archegos from $1.5 billion to $35 billion in only a year's time. The charges further allege they were able to do this by lying to counterparts of Archegos to get increased trading capacity so the company could buy stocks in their most concentrated form, therefore driving up the price.
The fraud largely flew under the radar, prosecutors say, because Hwang ran Archegos as a private firm taking care of his family's fortune, thus evading the regulations other hedge funds face.
Archegos collapsed last March after creating their large portfolio of stocks on borrowed money, which triggered margin calls that the company could not meet, causing banks, like Credit Suisse, to lose at least $10 billion.
Deputy Attorney General Lisa Monaco, who was also at Wednesday's press conference, noted that financial crimes like this hurt more than just executives.
“This kind of crime, the kind of crime that leaves a financial crater in its wake, this kind of crime jeopardizes pensions, savings and jobs,” said Monaco. “We are committed to doing all we can to combat corruption.”
The Securities and Exchange Commission also on Wednesday released parallel charges against Archegos, Hwang and other fund officials for the fraud scheme.
“We allege that Hwang and Archegos propped up a $36 billion house of cards by engaging in 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," Gurbir S. Grewal, director of the SEC’s Division of Enforcement, said in a statement. "But the house of cards could only be sustained if that cycle of deceptive trading, lies and buying power continued uninterrupted, and once Archegos’s buying power was exhausted and stock prices fell, the entire structure collapsed, allegedly leaving Archegos’s counterparties billions in trading losses."
SEC Chair Gary Gensler noted that the agency is actively fighting for more transparency in the market and large family firms — a call that found a megaphone in the wake of the Archegos collapse .
"The failure of Archegos underscores the importance of our ongoing work to update the security-based swaps market to enhance the investor protections, integrity, and transparency of this market,” Gensler said in a statement.
Hwang's defense attorney Lawrence Lutsberg said his client is innocent.
“There is no evidence whatsoever that he committed any kind of crime,” Lutsberg said in a statement. “Let alone the overblown allegations that pervade this indictment.”
Hwang has had a run-in with feds previously, reaching a civil settlement with regulators in 2012 regarding an insider-trading investigation of his former hedge fund. In that matter, Hwang forked over $44 million in fines.
Both Hwang and Halligan face a maximum 20-year sentence for each charge, with a hearing in court scheduled for later Wednesday. Scott Becker, the former chief risk officer at Archegos, and William Tomita, the firm’s former top trader, were also listed as defendants in the SEC complaint and have pleaded guilty to the criminal charges.
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