This story was updated after Bill Hwang and Patrick Halligan pleaded not guilty and includes new statements from Hwang’s lawyer.
The story of Bill Hwang is the kind you used to see in the years after the financial crisis. Here was something of a self-made man, emigrated from Korea, who got rich — like, $30 billion in the bank rich. There was, naturally, a trail of insider-trading accusations and wire-fraud charges against him from his days as a trader. He’d rebuilt himself through a lightly regulated hedge-fund-like firm, Archegos Capital Management. Then, out of nowhere, he lost nearly everything in just two days last spring after Archegos blew up in spectacular fashion, on its way down badly damaging a handful of banks and halving the price of ViacomCBS, one of its main holdings. It’s a neat trick, losing more than $20 billion in two days, but Hwang did it, the absolute GOAT of losing money. But here’s the thing: Hardly anybody had ever heard of the guy. His reputation, even inside the finance and charity circuits, was negligible. The paper trail that would have shown his largesse was nonexistent. In the months after, Wall Street tried to piece together how it could have happened.
Now, Hwang’s rise to become one of the world’s richest men and his fall into ignominy is getting a fuller telling. On Wednesday morning, federal agents arrested Hwang — along with his top consigliere, Patrick Halligan — on charges of racketeering, securities and wire fraud, and market manipulation. On Wednesday afternoon, Hwang pleaded not guilty and was released on a $100 million bond, while Halligan entered the same plea and was released on $1 million bail. Their lawyers also sent me statements, through a spokesman, claiming they are innocent and had been cooperating with investigators. “We are extremely disappointed that the U.S. Attorney’s Office has seen fit to indict a case that has absolutely no factual or legal basis; a prosecution of this type, for open-market transactions, is unprecedented and threatens all investors,” Hwang’s lawyer, Lawrence S. Lustberg, said in a statement. The alleged scheme bloated Archegos from a $1.5 billion firm to a $35 billion one in a single year and had manipulated the market for its holdings from $10 billion to $160 billion, according to the indictment filed in Manhattan federal court. It’s the kind of alleged scheme that relies on dark parts of the derivatives markets and financial sleights of hand that were hallmarks of the pre-financial-crisis era, the kind that seems almost quaint amid the flood of crypto frauds that have made the traditional world of finance look boring by comparison. “The collapse of Archegos last spring demonstrated how activities by one firm can have far-reaching implications for investors and market participants,” Gary Gensler, chairman of the Securities and Exchange commission, said in a statement. The regulatory agency has filed a parallel civil suit claiming market manipulation.
The whole Hwang saga shows just how much of Wall Street remains shrouded in secrecy 12 years after the Obama administration passed its landmark Dodd-Frank regulatory overhaul. In the parlance of Wall Street, Archegos — a Greek word for “one who leads the way” — was not a hedge fund but a “family office.” Family offices act in ways that can be indistinguishable from any hedge fund, but because the managers are investing their own funds, they are more lightly regulated. It’s a distinction that sounds innocent enough but has about the same tenuous relation to reality as does calling agriculture conglomerate Monsanto a farmer. Archegos, for instance, flew under Wall Street’s radar in part because it didn’t have to make the kind of public disclosures that it would have had to if it were a hedge fund, such as showing that it was building up large ownership stakes — positions that ultimately reversed in price and led to its collapse. That apparently empowered Hwang and his top traders to allegedly lie to their trading partners and banks holding their money about the extent of its holdings.
Hwang was able to swell Archegos so much and so quickly through the kind of financial engineering that is still commonplace on Wall Street today, if not to the extent allegedly executed by Archegos. The main tool in Hwang’s arsenal was a synthetic instrument that moved in lockstep with the price of stock that he already owned. These instruments, called total return swaps, essentially move like stocks. By holding these swaps, though, firms get to build up huge positions, like Hwang’s $20 billion bet on ViacomCBS, and stay in the dark. He also borrowed heavily, using money from his trading partners — a practice known as trading on margin, which carries the risk of having to very suddenly pay back that cash if things turn sour.
Things collapsed last March. At the time, Archegos’s position in ViacomCBS was so large that it was the equivalent of half of all of the company’s outstanding shares, even though, on paper, it would have been a minor investor, according to the indictment. During the previous year, the company’s shares had exploded by more than 600 percent — in part because of allegedly manipulative trading by Archegos. When the company announced that it was going to start issuing more shares — effectively diluting the market — Hwang doubled down and started a flurry of trading to “overpower the market” in order to avoid margin calls, according to the indictment. The amount of money on the line was so huge, and so risky, that the Archegos’s chiefs allegedly knew they were heading into the abyss. “Are we going to be able to pay for these trades today? I don’t see how we can,” Halligan said, per the indictment. In calls with the firm’s trading partners, another one of Hwang’s top lieutenants allegedly lied about having as much as $9 billion in cash.
A few days later, Archegos was toast. The fallout was severe: Morgan Stanley and Goldman Sachs further drove down ViacomCBS’s share price in a fire sale of Archegos’s collateral. Credit Suisse, one of the banks that helped Archegos build up its positions, lost $5.5 billion, shut down the brokerage unit that works with hedge funds, and admitted to falling down on the job, while other banks such as Nomura, Morgan Stanley, UBS, and Mistubishi UFJ also saw hundreds of millions in losses.
Archegos’s collapse never spread that far throughout the financial system — especially compared to the collapse of Lehman Brothers in 2008. But Hwang’s and Halligan’s arrests hearken back to the era following those days, when the Manhattan U.S. Attorney’s office, then led by Preet Bharara, prosecuted a parade of hedge-fund managers, such as Raj Rajaratnam, for fraud and insider trading — many of whose convictions were later overturned on appeal, owing to the vague case law that defines securities fraud.