Archegos Capital Management founder Bill Hwang and chief financial officer Patrick Halligan have been indicted on charges of securities fraud, wire fraud and racketeering, federal prosecutors in Manhattan said Wednesday.
Prosecutors alleged the men took part in interrelated schemes to unlawfully manipulate the prices of stocks and to defraud leading global investment banks and brokerages.
They alleged that Mr. Hwang’s fraud pumped Archegos’s portfolio from $1.5 billion to $35 billion in one year, ending in March 2021—and inflated its market size from $10 billion to $160 billion in that period including its borrowings from Wall Street firms.
Federal prosecutors are expected to announce the charges at a morning news conference.
The indictment alleges Messrs. Hwang, Halligan and others used Archegos to perpetuate two interrelated criminal schemes that hurt market participants and Archegos employees and saddled its lenders with billions in losses.
First, Mr. Hwang worked to defraud market participants by manipulating the market for some securities in Archegos’s portfolio, and then he led market participants to believe that the resulting share prices were the result of supply and demand, rather than his deceptive conduct, prosecutors alleged .
“The defendants and their co-conspirators used Archegos, a family office that invested Hwang’s personal fortune, as an instrument of market manipulation and fraud, with far-reaching consequences,” the indictment said. More than $100 billion in market value for more than a dozen companies disappeared within days, according to the indictment.
A lawyer for Mr. Hwang said his client is “entirely innocent” and there is “no evidence whatsoever that he committed any kind of crime.” A lawyer for Mr. Halligan said her client is “innocent and will be exonerated.”
The Securities and Exchange Commission in a separate civil-fraud complaint sued Messrs. Hwang and Halligan as well as William Tomita, Archegos’s head trader, and Scott Becker, its chief risk officer. Attorneys for Messrs. Tomita and Becker didn’t immediately respond to a request for comment.
Archegos collapsed in March 2021, and its unwind sent shock waves through Wall Street. Banks scrambled to liquidate positions tied to Archegos, rapidly shaving tens of billions of market value off large companies and, when the dust had settled, dealing more than $10 billion in losses to counterparties including Credit Suisse Group AG
Morgan Stanley and Nomura Holdings Inc.
At Archegos, Mr. Hwang built up big, concentrated positions in companies and held some positions in a mix of cash and swaps with money borrowed from banks across Wall Street. Mr. Hwang favored total-return swaps that gave Archegos the profits and losses on the stocks underlying the swap contracts while its lenders held the securities.
Their use allows for investors to maintain their anonymity and avoid disclosure requirements above a certain threshold of ownership because they don’t technically own the shares.
When stocks owned by Archegos rose, Mr. Hwang added to his top performers, often using swaps.
Prosecutors said Archegos typically would buy stock until it owned about 5% of a company’s outstanding shares, and that Mr. Hwang required additional exposure to be made through total-return swaps.
Messrs. Halligan, Tomita, Becker and others, with Mr. Hwang’s blessing, repeatedly made materially false and misleading statements about Archegos’s portfolio to the firm’s counterparties across Wall Street in an attempt to get them to trade with, extend credit to and hide the grave risk of doing business with Archegos, prosecutors alleged.
Archegos sought to dominate the market for its top holdings, according to the SEC, and layered increasingly higher-priced orders throughout trading days to bid up prices. He also engaged in manipulative trading at the end of the day, in an effort to drive up the closing price of securities it owned, according to the SEC.
Its trading in some securities sometimes surpassed 40% of the total daily trading volume in those stocks, the SEC said.
US-listed Chinese companies were among Archegos’s largest positions, and manipulated stocks included ViacomCBS Inc.,
Discovery Inc., now known as Warner Bros. Discovery Inc.,
GSX Techedu Inc.,
now known as Gaotu Techedu Inc., China Internet search giant Baidu Inc.
and luxury online retailer Farfetch ltd.
according to the indictment.
By late March 2021, the indictment said, Archegos had positions of more than $10 billion in GSX, Baidu and Tencent Music Entertainment Group,
and more than $20 billion in ViacomCBS.
Archegos effectively owned more than 50% of ViacomCBS’s outstanding shares, the SEC said.
In one text-message exchange with an analyst in June 2020, Mr. Hwang said a recent uptick in ViacomCBS’s share price was “a sign of me buying,” followed by a “tears of joy” emoji, according to the SEC’s complaint.
The SEC said ViacomCBS shares rose about 150% in three months, during a period when Archegos was aggressively buying shares and swaps.
But the dynamics favoring Mr. Hwang had shifted by March 2021, by which time his strategy had left Archegos “highly vulnerable” to volatility in a small number of stocks. Already pressured by mounting losses in companies including Baidu and Farfetch, the announcement of additional financing by ViacomCBS in late March sent its stock price falling and effectively triggered the unraveling of Archegos.
Rather than sell positions to meet margin calls from lenders, prosecutors allege, Mr. Hwang told his traders “to engage in a desperate buying spree in an attempt to reverse the price declines of stocks underlying Archegos’s core positions.” But the efforts couldn’t staunch the bleeding.
—Dave Michaels contributed to this article.
Write to Corinne Ramey at Corinne.Ramey@wsj.com, Susan Pulliam at email@example.com and Juliet Chung at firstname.lastname@example.org
Copyright ©2022 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8