An unprecedented fraud on Wall Street. Pious investor Hwang heads to court

The indictment consists of eleven felonies, including racketeering and conspiracy, that are part of the Racketeer Influenced and Corrupt Organizations Act, known as RICO. The law, passed in 1970, helps prosecute organized crime groups, but U.S. prosecutors also use it in white-collar fraud cases like Hwang’s.

Hwang also faces charges of securities fraud, electronic money fraud and market manipulation. For each of these charges, he faces a maximum sentence of 20 years in prison if convicted, reports Bloomberg.

Along with former Archegos CFO Patrick Halligan, he will be on trial in Manhattan federal court beginning May 8, with witnesses including executives from leading Wall Street banks and two former Archegos senior executives, Scott Becker and William Tomita, testifying.

What the prosecution claims

According to the Securities and Exchange Commission (SEC), which filed a civil lawsuit against Archegos, Hwang, in collaboration with his chief trader Tomita, used manipulative trading tactics such as intraday price gouging and trading at the close of the market to increase the value of shares in the company’s portfolio .

Further, with the help of Halligan, Tomita and Becker, a risk manager, the firm allegedly lied to lenders about the risks inherent in its portfolio in order to obtain even more loans.

In 2020, according to prosecutors, Hwang increased the value of his personal fortune from $1.5 billion (35 billion crowns) to around $36 billion (844 billion crowns), while Archegos’ positions grew to more than $160 billion (3, 7 trillion crowns).

Prosecutors further allege that Hwang hid his trades from the market and avoided regulatory scrutiny by trading derivatives known as swaps instead of trading the stocks themselves.

“The use of swaps allowed Archegos to avoid disclosure when its holding exceeded five percent as required by regulators,” the indictment states. The use of swaps also allegedly made it possible to manipulate the share price of firms in which Archeogos held a majority and at the same time were not commonly traded. Thus, it was enough to trade a relatively small amount of securities for manipulation.

Hwang and Halligan, who both plead not guilty and are fighting the charges, say they followed the law. It does not require detailed reporting or disclosure of exchange transactions from family offices. According to them, the firm used multiple counterparties to minimize risk, not to hide the nature of its trades. At the same time, they point to the fact that the transactions took place with large, sophisticated banks that made large profits from doing business with Archegos.

Hwang, a devout Christian

The son of a Christian pastor, Hwang was born in Korea and immigrated to the US in 1982. He worked at Julian Robertson’s Tiger Management and then founded Tiger Asia Management, one of several offshoots known collectively as Tiger Cubs.

Already in 2012, when Hwang led Tiger Asia, the Securities and Exchange Commission accused him of so-called insider trading, i.e. trading securities based on non-public information.

Although he made billions, he kept his wealth under wraps and lived in a low-profile house in suburban New Jersey. He regularly read from the Bible and looked after the Grace and Mercy Foundation, a philanthropic organization he founded with his wife to support the poor and oppressed. At the end of 2022, the foundation had assets in the amount of 528 million dollars, i.e. roughly 12.3 billion crowns.

Hwang named his company Archegos, which he founded in 2013, after the Greek word for “leader” or “one who leads,” which is often used to refer to Jesus.

On Wall Street, Bill Hwang was inconspicuous as he managed his own wealth through his “family office”. These are subject to few disclosure requirements, so Archegos has flown under the regulatory radar.

However, in March 2021, Archegos suddenly collapsed, making headlines and nearly wiping out Hwang’s $36 billion fortune.

Archegos implosion

On March 22, 2021, ViacomCBS, which was Archegos’ largest holding company at the time, announced a secondary offering of shares worth three billion dollars (70 billion crowns), which led to a 10 percent drop in its shares.

In the same week, the US Securities and Exchange Commission announced that it would increase regulation of companies based in China. This has created pressure to hold Chinese depositary receipts, which make it easier to buy shares of foreign companies in the US.

Archegos’ losses set off a cascade of so-called margin calls, which occur when the assets held by a borrower to a lender fall too low. The company was unable to meet its financial obligations. The situation worsened in the days following ViacomCBS’s collapse, when Hwang put the firm’s remaining cash into frenzied trading in the vain hope of boosting the value of Archegos’ shares, according to the government.

“Will we even be able to pay for these stores? I don’t know how we could,” CFO Halligan asked at that point, according to the government.

Devastating consequences

Investment banks such as Credit Suisse, UBS or the Japanese Normura, from which Archegos borrowed huge sums to finance the purchase of a large volume of shares, lost tens of billions.

The Credit Suisse bank lost 5.5 billion dollars (roughly 129 billion crowns) during this collapse. This scandal helped bring it into crisis, which ended last year with its sale to rival bank UBS. Nomura Holdings lost 2.9 billion dollars (roughly 68 billion crowns). This affair cost Morgan Stanley 911 million dollars (more than 21.3 billion crowns).

The executives of these banks are likely to be witnesses in the case, Bloomberg concludes.