U.S. charges Archegos founder Hwang with fraud alleging 'brazen scheme' By Reuters

2/2© Reuters. FILE PHOTO: 888 7th Ave,Lily Forex docking a building that reportedly houses Archegos Capital is pictured in the Manhattan borough of New York City, New York, U.S., March 29, 2021. REUTERS/Carlo Allegri/File Photo2/2

By Jody Godoy

(Reuters) - Federal prosecutors have charged the owner of Archegos Capital Management Bill Hwang with racketeering and fraud as regulators said his manipulation of stock prices cost banks billions of dollars when his "house of cards" collapsed, according to documents released on Wednesday.

Archegos, a family office run by former Tiger Asia manager Hwang, defaulted on margin calls in March of last year, leaving big name banks nursing heavy losses and sparking a fire sale of shares including ViacomCBS (NASDAQ:PARA) and Discovery (NASDAQ:WBD) Inc.

The blowup cost global banks including Credit Suisse (SIX:CSGN), Nomura Holdings (NYSE:NMR), Morgan Stanley (NYSE:MS) and Deutsche Bank (ETR:DBKGn) more than $10 billion in losses.

Prosecutors allege that Hwang, who denies wrongdoing, manipulated the stock price of seven of Archegos' portfolio companies, including Viacom, Discovery and Tencent Music Entertainment, according to an indictment brought by the U.S. Attorney's office in Manhattan.

A lawyer for Hwang said in a statement the case had "absolutely no factual or legal basis."

Prosecutors say Hwang did so by deliberately misleading counterparties about the positions Archegos held and controlling the timing and size of trades to have a greater impact on price, the indictment said.

The U.S. Securities and Exchange Commission separately brought a complaint.

"Archegos engaged in a brazen scheme to manipulate the market," the SEC said. "Eventually, the weight of Defendants’ fraudulent and manipulative scheme was too much for Archegos to bear, and over the course of less than a week in late March 2021, the house of cards collapsed."

Prosecutors said that Hwang and the family office's former chief financial officer, Patrick Halligan "corrupted the operations and activities" of the family office to manipulate the price of stocks it held and lied to banks and brokerages, which lost billions on trades.

The SEC said it had sued Hwang, Halligan, head trader William Tomita, and Chief Risk Officer Scott Becker for their alleged roles in the scheme.

"As you will see when the facts unfold, Bill Hwang is entirely innocent of any wrongdoing; there is no evidence whatsoever that he committed any kind of crime, let alone the overblown allegations that pervade this indictment," the lawyer, Lawrence S. Lustberg, said in a statement. He said that Hwang had previously fully cooperated with the government.

“Pat Halligan is innocent and will be exonerated," a lawyer for Halligan said.

Attorneys for Becker and Tomita did not immediately respond to requests for comment.

SEC enforcement director Gurbir Grewal said Hwang and the firm "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."

U.S. Attorney Damian Williams and Deputy Attorney General Lisa Monaco are scheduled to hold a news conference on the charges on Wednesday morning.

Hwang built up leverage by using derivatives known as total return swaps from major Wall Street banks. The trades allow investors to bet on stock price moves without owning the underlying securities. Instead, the bank buys the stocks and promises the investor a performance-related return. The client, in turn, posts collateral to secure the trades with the bank.

The swaps allowed Hwang to hide his positions and evade regulatory scrutiny, the SEC said.

Family offices are private funds that manage the wealth of individuals. Single family offices have few regulatory requirements.

(The story refiles to say "on Wednesday" instead of "on Monday" for timing of news conference, paragraph 15.)

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