ARCHEGOS FRAUD MASTERMIND BILL HWANG CAUSED INVESTORS TO LOSE BILLIONS OF DOLLARS AND SHOULD PAY RESTITUTION

To:      Interested Parties

From:  Dennis Kelleher, President and CEO (Media Contact: Anton Becker, Dir. of Communications,  abecker@bettermarkets.org)

Date:   December 17, 2024

Re:      Archegos’s Bill Hwang should be required to make restitution to investors as well as the too-big-to-fail Wall Street bank counterparties.

OVERVIEW.

On Thursday, December 19, 2024, the federal district court in New York will convene the second phase of a sentencing hearing for Sung Kook (Bill) Hwang (“Hwang”), the mastermind of one of the most outrageous and largest securities frauds in history. The vehicle for the scheme was the now infamous Archegos Capital Management (“Archegos”), a “family office” hedge fund that Hwang set up to manage his personal wealth and that of his family and his employees. This memo addresses the unfairness of the Government’s recommendation that Hwang be ordered to make restitution to the megabanks that served as his lenders and counterparties but not to the innocent investors who collectively lost billions of dollars as they traded in the stocks that Hwang manipulated.

On November 20, 2024, Hwang received an 18-year prison sentence for his crimes. What remains to be determined is the scope of the restitution that Hwang must pay to his many victims—how much and to whom. The Government has recommended restitution for the benefit of the banks that were actually indispensable (and supposedly unwitting) players in the fraud. It has also recommended restitution for the employees of Archegos who lost some of their compensation through the scheme.  What is striking, and unacceptable, is that the Government has expressly determined not to seek restitution for the benefit of any of Hwang’s many investor victims—those market participants who lost money as they traded in the shares that Hwang manipulated and saw billions of dollars in share value evaporate virtually overnight when the fraud collapsed. The enormous scale of those losses is reflected in the fact that “more than $100 billion in apparent market value for nearly a dozen companies disappeared within a matter of days.”  See USA v. Sung Kook (Bill) Hwang, 22-CR-240 (S.D.N.Y), Sentencing Memorandum of the United States of America (“GSM”), at 12. That’s ten times greater than the roughly $10 billion that the banks have claimed in losses from Hwang’s fraud.  And those investors were genuinely innocent victims who played no role in the fraud, unlike the banks.

The Government asserts, in a single sentence, that “the number of identifiable victims is so large as to make restitution impracticable.” See GSM at 56. However, the Government fails to explain the factual basis for this conclusion, the precedents that apply to what is supposed to be a narrow statutory exception to mandatory restitution, or the profound unfairness of providing restitution to the bank participants in the fraud while leaving the investors with nothing.

The Government has portrayed the banks as victims of Hwang’s fraud. However, it strains credibility that at least nine of the largest banks in the world, supposedly staffed and equipped with the smartest bankers in the world and the most sophisticated trading, control, and compliance systems in the world, had no idea that Hwang was engaged in a market manipulation scheme. After all, these banks are using the most advanced technology and algorithms not just to trade but also to collect huge amounts of information across all markets (i.e., stock, debt, derivatives, etc.) and to analyze and synthesize that data in real time, often in milliseconds if not nanoseconds. That information enables them, again in real time, to gain a comprehensive 360-degree view of what is happening in particular stocks as well as the markets as a whole and their price trajectories.  While anything is possible, the claim at the core of the banks’ story—which the Government has apparently accepted—is that this one person, Hwang, outsmarted all those brilliant bankers and traders, as well as the technologies at their disposal. That seems unlikely. In any event, those banks are better positioned to protect themselves and withstand losses than the innocent investors, who under the Government’s recommendation would receive no benefit from a restitution order against Hwang.

For these reasons, and as explained in more detail below, the Court should reject the Government’s position and order Hwang to make restitution to his investor victims before the too-big-to-fail banks receive any additional restitution.^[1] Any practical challenges that requiring restitution might present can and should be overcome.

THE FRAUD WAS IMMENSE.

Over the course of just twelve months, from March 2020 to March 2021, Hwang planned, led, and implemented one of the largest and most damaging securities frauds in history. Hwang focused primarily on a small number of publicly traded stocks, such as ViacomCBS and Warner Brothers Discovery. He artificially pumped up and maintained their prices with huge purchases, carefully calculated trading strategies designed to inflate prices, and the use of derivatives that allowed him to effectively acquire vast numbers of shares without having to report and disclose his holdings.  As the Government proved, he also repeatedly lied to and concealed information from his banks, thus persuading them to continue extending credit and facilitating the acquisition of shares even as his scheme was about to implode.

The manipulation succeeded in generating billions of dollars of wealth for Hwang, seemingly out of thin air, until it spectacularly collapsed. The result was massive financial harm inflicted on a wide range of victims, including unsuspecting, everyday investors who lost billions of dollars trading in the manipulated stocks. Collectively, the stocks Hwang manipulated lost more than $100 billion in market capitalization. Archegos employees also suffered harm, as much of their deferred compensation was gambled away through Hwang’s scheme. And at least nine large banks, which pocketed substantial fees from facilitating Hwang’s trading along the way, ended up sustaining losses on the order of $10 billion.

THE PROSECUTION WAS SUCCESSFUL.

On April 25, 2022, a grand jury in the Southern District of New York returned an eleven-count indictment charging Hwang with a long list of crimes, including securities fraud, market manipulation, and racketeering conspiracy. See Department of Justice indicts Sung Kook “Bill” Hwang. As the Government alleged in its indictment, Hwang and his co-conspirators used Archegos:

as an instrument of market manipulation and fraud, with far-reaching consequences for other participants in the United States securities markets, companies whose stock prices they manipulated, innocent employees of Archegos whose savings they gambled, and the financial institutions left holding billions of dollars in losses.

Indictment at 1.

To its credit, the Government successfully prosecuted Hwang, and this summer, following a two-month jury trial, Hwang was convicted on ten counts of securities fraud, wire fraud, racketeering conspiracy, and market manipulation. The first phase of Hwang’s sentencing was held on November 20, 2024, in the federal district court in the Southern District of New York. The Court sentenced Hwang to 18 years in prison, three years less than the Government’s recommended term of 21 years. GSM at 38.

However, the court scheduled another sentencing session for Thursday, December 19, to address a number of unresolved issues. For example, Hwang has urged the court to reduce the 18-year sentence he received on November 20, 2024. As reflected in a memorandum Better Markets issued on November 19, 2024, regarding Hwang’s sentencing, the 18-year term should not be reduced. In addition, and of critical importance here, the Court is expected to address the amount of restitution Hwang must pay to victims of his fraud and exactly who will receive the benefit of that restitution.

THE GOVERNMENT’S RECOMMENDATION WOULD RESULT IN A HUGE INJUSTICE BY LEAVING INVESTORS WITHOUT ANY RESTITUTION.

The Government has proposed restitution for two classes of victims: “Innocent” employees of Archegos who were forced to put a significant portion of their compensation at risk in Hwang’s scheme, and the large banks that traded with Hwang, generated large fees, and enabled him to perpetuate the fraud.  GSM at 55-56.  Strikingly absent from this recommended approach is any restitution for the many investors who suffered losses from trading the stocks that Hwang manipulated.

This approach is unfair on its face. It will primarily benefit the counterparty banks that did business with Hwang in the course of the fraud and presumably generated huge fees from transacting with Hwang. But it will do nothing to help those investors who traded in the stocks that Hwang manipulated and who suffered in some cases undoubtedly huge losses when the scheme, and stock prices, collapsed.

The Government and the Court should rectify this omission for three reasons:

1. The record shows indisputably that ordinary investors were victims who suffered large losses as a result of Hwang’s stock manipulation scheme;
2. The law entitles those investors to restitution, and the exception for cases where the number of victims makes restitution impractical should not be applied; and
3. As between the banks who were instrumentalities of the fraud, witting or not, and investors who had no reason to suspect that the stocks they were trading had been manipulated, it is far more equitable and just to ensure that the investors benefit from restitution.

   The Investors Are Indisputably Victims.

As the Government has acknowledged, ordinary market participants were clearly among those who suffered harm from Hwang’s massive market manipulation scheme: 

Ultimately, the market manipulation and fraud schemes, and the billions of dollars in losses that they caused, victimized a wide swath of market participants, including banks and prime brokers that engaged in loans and securities trading with Archegos based on lies and deceit, ordinary investors who purchased and sold the relevant securities at artificial prices, and securities issuers who made business decisions based on the artificial prices of their stocks. The schemes also caused millions of dollars of losses to innocent Archegos employees who had been required to allocate to Archegos a substantial amount of their pay as deferred compensation.

GSM at 12 (emphasis added).  Again and again, the record acknowledges the damage that Hwang inflicted specifically on investors:

• “More than $100 billion in apparent market value for nearly a dozen companies disappeared within a matter of days.” GSM at 12.
• “Hwang caused artificial increases and decreases in the prices of multiple publicly trade stocks. In so doing, Hwang caused losses to innumerable other traders who bought at artificially inflated prices through the marketplace. The trial proof included market transaction data that showed many thousands of transactions in the manipulated stocks during the scheme.” GSM at 33.
• “Hwang’s actions directly led to billions in losses for market participants . . . .” ” GSM at 41.
• “Hwang’s conduct deceived investors” and—as the jury found—“was calibrated to do so.” GSM at 39.

2. The Law Requires Restitution, and the Statutory Exception for Cases Involving Large Numbers of Victims Should Not Apply.

As the Government correctly notes in its sentencing submission, under the Mandatory Victim Restitution Act (“MVRA”), the Court must order restitution to Hwang’s victims. The MVRA provides that a sentencing court “shall order . . . that the defendant make restitution to the victim” of certain types of Title 18 offenses, including any offenses against property committed by fraud or deceit, such as those involved here. See 18 U.S.C. § 3663A(a)(1), (c)(1)(A)(ii). A “victim” under the MVRA is a “person directly and proximately harmed as a result of the commission of an offense.” 18 U.S.C. § 3663A(a)(2).

The restitution amount is to be determined by a preponderance of the evidence, and the Court has “broad discretion to determine restitution.” Moreover, the court need only make a “reasonable estimate” of the actual loss “based on the evidence before it.” United States v. Milstein, 481 F.3d 132, 137 (2d Cir. 2007); see also United States v. Marino, 654 F.3d 310, 319 (2d Cir. 2011) (focusing on the causation requirement for restitution but observing that restitution under the MVRA is a “remedial measure” that should not be applied rigidly).

Nevertheless, in a single sentence in its 63-page memorandum, the Government invokes a statutory exception to the restitution mandate, simply stating that it “does not seek to compel Hwang to restitute all the market participants who suffered losses as a result of his manipulative trading schemes because the ‘number of identifiable victims is so large as to make restitution impracticable.’ 18 U.S.C. § 3663A(c)(3)(A).” GWM at 56. The memorandum fails to explain the factual basis for this conclusion, the precedents that apply the exception, or the profound unfairness inherent in providing restitution to the bank participants in the fraud while leaving the investors with no possibility of benefiting from a restitution order.

There is precedent for the proposition that public market victims of artificial price inflation should receive restitution even where the process poses significant practical challenges. In United States v. Gushlak, 728 F.3d 184, 203 (2d Cir. 2013), the Second Circuit affirmed the district court’s loss calculation in imposing restitution under the MVRA for the defendant’s role in manipulating the price of a publicly traded stock, over a year after conviction. In Gushlak, the Government attempted and failed to prove losses not less than three times, including with victim affidavits of loss and an expert that did not rely upon trading records. It was only on the fourth attempt to show losses through an expert using a “fair market price” regression analysis, and the use of comparable stock that behaved like unmanipulated stock, that the district court was satisfied that the Government had set forth a reasonable estimate of victim losses, grounded in a sound approximation of the full amount. On appeal, the Second Circuit affirmed this method and noted that, “the need to compensate victims outweighed challenges of measurement.” Id. at 193.

In United States v. Ageloff, 698 F.3d 64 (2d Cir. 2012), the Second Circuit affirmed the district court’s repeated refusal to invoke the complexity exception, despite several years spent determining restitution to over 9,000 victims. The district court had concluded that while determining restitution involved some “tedium,” it should nevertheless be awarded. As the district court explained:

I read most of Ageloff’s objections to the Restitution Report as an effort to refuel that position [on the burden of restitution] by manufacturing complexity in the hope that I might, at this late date, wave the white flag and decide that the matter of restitution is too complex or too much of a burden on the system after all. It is neither. Indeed, it would be an unconscionable injustice to grant such a windfall to the architect, engineer and enforcer of a massive fraud that injured so many thousands of investors and netted him many millions of dollars, and who has already resorted to additional criminal conduct (the Florida conviction) to avoid the financial consequences of his crime.

United States v. Ageloff, 809 F. Supp. 2d 89, 99 (E.D.N.Y. 2011) (emphasis added). The same can be said about restitution in this case:  It would be a grave injustice to forego restitution in favor of investors based simply on the practical challenges it may pose.

And in United States v. Goodrich, 12 F.4th 219, 230 (2nd Cir. 2021), the Second Circuit affirmed an order from the Eastern District of New York awarding restitution under the MVRA, where the defendant’s fraudulent manipulation injured investors who had purchased shares in the public market.^[2] See also United States v. Stein, 964 F.3d 1313 (11th Cir. 2020) (holding that restitution was warranted where defendant was convicted of wire fraud, mail fraud, and securities fraud for his actions in inflating the stock price of his company); United States v. Sarad, 227 F. Supp. 3d 1153 (E.D. Cal. 2016) (holding that the complexity exception to MVRA did not permit sentencing court to decline to award restitution to victims of defendant’s security fraud, as causation of the victims’ losses was resolved by defendant’s guilty plea).

While identifying Hwang’s investor victims and reasonably estimating their losses may be a somewhat involved process, it is possible and manageable. Indeed, it is less daunting than it is in some complex cases. For example, Hwang’s manipulation scheme spanned only twelve months, GSM at 8, and it involved a relatively small group of stocks, five of which received the most attention in the Government’s submission, GSM at 29, 31.  In addition, the record already explores two alternative methods for calculating the magnitude of the market losses attributable to the manipulation scheme, at least in the aggregate, GSM at 28-29, with more proof available, GSM at 30. The reality is that although the labels and specific mechanisms vary, it is commonplace for cases to result in restitution to victims of a large-scale fraud, whether it be through an order in a civil enforcement action, restitution under Title 18, or a bankruptcy proceeding.^[3] Hwang’s investor victims deserve no less, and the MVRA requires it under the circumstances.

3. It Is Inequitable to Order Restitution for the Benefit of the Banks But Not for the Investors.

In this case, it is profoundly unfair to favor the banks over the investors in fashioning the restitution remedy. Restitution, now enshrined in a mandatory statutory provision, has its roots as an equitable remedy designed to ensure that fairness and justice is achieved. But the sentencing recommendation flies in the face of equity.

Here, the investors were innocent market participants and victims. As the Government points out, the investors had no reason to question the prices of the stocks Hwang manipulated:

Hwang’s trading strategies and use of multiple counterparties led market participants to believe that the prices of those stocks were the product of natural forces of supply and demand when, in fact, they were the artificial product of Hwang’s manipulative trading and deceptive conduct that caused trading by others.

GSM at 10.

In contrast, at every turn, the record in this case indicates that the banks were at least reckless in their participation in the Hwang manipulation scheme, turning a blind eye to abundant evidence that Hwang was engaged in an illegal enterprise. Consider the following facts drawn from the record:

• Hwang’s Prior History of Fraud.  Hwang had a disciplinary history of engaging in fraud, and the banks either knew of it or should be presumed to know of it. For example, through his prior firm known as Tiger Asia, Hwang engaged in wire fraud, insider trading, and manipulation. GSM at 5. Moreover, Hwang himself was sued by the SEC for alleged insider trading and manipulation, and he settled under terms including a multi-year bar from managing outside investments and a permanent injunction against violating the anti-fraud provisions of the securities laws. GSM at 6, 36. Perhaps for these reasons, among others, at least one bank initially refused to “onboard Archegos” but relented after receiving assurances about its supposedly upright business practices. GSM at 25.
• The Tools and Strategies Hwang Used.  Hwang relied on a combination of trading strategies, financial instruments, and a widespread network of banks, which together can best be described as a veritable recipe for market manipulation. They should have raised massive red flags for the banks. They included (1) using total return swaps, which are financial instruments that enable traders to control shares of stock covertly and to increase risky leverage; (2) trading heavily on the maximum possible margin, also a high-risk strategy; (3) buying shares in extraordinary volumes, at times acquiring a huge percentage of a stock’s outstanding float; (4) using multiple bank counterparties to increase trading volume, maximize margin, and prevent any bank from acquiring an accurate and coherent picture of Hwang’s overall operation; and (5) timing trades either early or late in the day to influence market perceptions of a stock and its price. As the Government notes, for example, Hwang “smashed huge volumes of trades through at the end of the day to drive up prices,” GSM at 39, which eventually even led some Wall Street analysts to question what was happening in the markets, at 39.
• Hwang’s Refusal to Address Concerns.  The record shows that the banks consistently failed to press Hwang for assurances about many aspects of his operations, including the concentration and liquidity of his portfolio as well his accounts with other banks. The banks inexplicably often relied simply on verbal assurances and “conversations.” GSM at 7. For example, as Hwang’s situation deteriorated in the Spring of 2021, the banks accepted mere verbal reassurances in “phone calls.” GSM at 12. On one occasion, Hwang falsely “told” banks during a “conference” that he could make them whole within weeks and that his top positions were highly liquid. GSM at 19. The record also shows that this information was highly consequential: Hwang’s level of concentration and liquidity related directly to whether Archegos could repay the banks, GSM at 21, and it represented information that if truthfully imparted, would have warranted outright termination of the relationship, GSM at 25-26. To cap it off, when Hwang refused to provide additional detail or documents to address their concerns, the banks were apparently content to accept his failure to cooperate. See, e.g., GSM at 12.

In light of all of these failings by the banks, it is no wonder that some of their employees were blamed, disciplined, and fired for trusting Hwang. GSM at 2. And at least one post-mortem of the entire episode by a special committee of Credit Suisse found there had been “internal risk management failures” at the bank. GSM at 26. Of course, the reason for the banks’ eagerness to deal with Hwang, notwithstanding the many warning signs, should be no mystery:  It was the promise of dealing with a multi-billion-dollar client that could generate massive fee revenue.  And all of this highlights the profound inequity in favoring the banks over the investors in fashioning relief.

As stated above, it strains credibility that at least nine of the largest banks in the world, with the smartest bankers in the world and the most sophisticated trading, control, and compliance systems in the world, simply had no idea that Hwang was engaged in any improper or illegal activity.  After all, these banks are using the most sophisticated systems and algorithms not just to trade in these stocks but also to collect information across all markets (i.e. stock, debt, derivatives, etc.), which is synthesized and analyzed in real time. While anything is possible, the claim at the core of the banks’ story, apparently embraced by the Government, is that this one individual—Hwang—outsmarted all those brilliant bankers and traders as well as the sophisticated market, compliance, and control systems at their disposal. That seems unlikely. In any case, those megabanks are better positioned to protect themselves and withstand losses than the genuinely innocent investors who currently stand to gain nothing from a restitution order.

CONCLUSION

For all of the foregoing reasons, the Government should change its position and recommend that the Court order Hwang to make restitution to all of his investor victims, and, in any event, the Court should include such a restitution order in its sentence.

APPENDIX A
A SAMPLE OF RESTITUTION CASES

Although the labels and specific mechanisms vary, it is commonplace for cases to result in restitution to victims of a large-scale fraud, whether it be through an order in a civil enforcement action, restitution under Title 18, or a bankruptcy proceeding. Here is a list of examples of instances where such remedies have been put in place.

1. SEC v. Volkswagen, No. 19-cv-1391 (N.D. Cal.).

In SEC v. Volkswagen, the SEC filed an enforcement action alleging that Volkswagen had mislead investors about its environmental compliance after Volkswagen was found to have installed software designed to manipulate emission tests in approximately 11 million diesel vehicles worldwide. On April 3, 2024, Volkswagen consented to a final judgment requiring the payment of $34.35 million in disgorgement and $14.4 million in prejudgment interest. On October 16, 2024, the U.S. District Court for the Northern District of California appointed KCC Class Action Services, LLC as the Distribution Agent to oversee the administration and distribution of the fund to affected investors.

1. Potter v. Valeant Pharmaceuticals, No. 3:15-cv-07658 (D.N.J.).

In Potter v. Valeant Pharmaceuticals, a class action was filed against Valeant accusing it of using deceptive accounting practices and hidden distribution channels to inflate its revenue. When the fraud was revealed, Valeant’s stock price plummeted from over $250 to under $20, erasing billions in shareholder value. The matter was settled for approximately $1.2 billion, out of which a Net Settlement Fund was created. The settlement class included all individuals and entities that purchased or otherwise acquired Valeant securities during the specified period. Eligible retail investors were required to submit a Proof of Claim and Release form by May 6, 2020, to participate in the settlement. This form necessitated detailed information about transactions in Valeant securities, including purchase and sale dates, quantities, and supporting documentation such as broker confirmations. The Net Settlement Fund was distributed among class members based on a court-approved Plan of Allocation. This plan calculated each claimant’s “Recognized Loss,” considering factors such as the type of security, the timing of transactions, and the alleged inflation in Valeant’s stock price due to the purported misconduct. The exact amount each retail investor received depended on their calculated Recognized Loss relative to the total Recognized Losses of all claimants, ensuring a fair and proportional distribution of the settlement funds.

Separately, the SEC established a $45.4 million Fair Fund to compensate investors harmed by Valeant as part of an administrative action. On August 22, 2024, the SEC issued an order approving the plan of distribution. Investors who purchased Valeant common stock or bonds between October 20, 2014, and April 28, 2016, are eligible to file claims for a share of this fund by January 16, 2025.

1. SEC v. Jeffrey Skilling et al., No. 4-cv-00284 (S.D. Tex.).

In the late 1990s, Jeffrey Skilling was the CEO of Enron, the nation’s largest natural gas and electricity marketer. Beginning in 1997, Skilling and other principals of Enron defrauded Enron’s shareholders by using off-balance-sheet transactions with certain Special Purpose Entities the principals controlled. As a result of these illegal actions, Enron’s stock price dropped from more than $80 per share to less than $1 and Enron eventually filed for bankruptcy in 2001. Numerous criminal and civil action ensued.  Among other avenues of recovery, including through class action, the Criminal Division of the DOJ released approximately $65 million in forfeited funds to the SEC for distribution to approximately 128,200 victims of the Enron Corporation securities fraud in June 2012. The funds were forfeited in several criminal and civil actions handled by the DOJ’s Enron Task Force, the Fraud Section of the Criminal Division and the DOJ’s Asset Forfeiture and Money Laundering Section.

1. SEC v. WorldCom, Inc., Civ. No. 02-4963 (S.D.N.Y.); In re: WorldCom, Inc., No. 02-13-533 (Bankr. S.D.N.Y); and U.S. v. Bernard Ebbers, 02-cr-1144 (S.D.N.Y.).

In the WorldCom scandal, thousands of investors were affected by an $11 billion dollar accounting fraud that resulted in WorldCom’s bankruptcy. Restitution funds came from several sources. As a result of a 2003 settlement with the SEC, WorldCom paid $500 million in cash and 10 million shares of new common stock (about $750 million dollars in total) towards restitution. The court granted the SEC authority to decide how to distribute the $750 million to investors who held WorldCom stock or bonds from April 1999 through the company’s bankruptcy proceedings. The settlement money went into a special fund known as the Fair Fund for investors harmed by a number of corporate accounting failures.  It was established under the 2002 Sarbanes-Oxley anti-fraud law enacted in response to the wave of corporate scandals including WorldCom and Enron. On November 7, 2003, the Court appointed former SEC Chairman Richard C. Breeden as Distribution Agent and former SEC Commissioner J. Carter Beese, Jr. as Equity Manager to oversee the distribution of the escrow fund to eligible investors who were harmed by WorldCom’s fraud. On July 19, 2004, the Court approved the SEC’s plan for distributing the funds.

In his criminal case, Bernard Ebbers, the founder and former chief executive of WorldCom, was found guilty of fraud by a jury and agreed to surrender nearly all of his approximately $40 million personal fortune to investors. Ebbers also was sentenced to 25 years in prison, of which he served 13 years before being released for health reasons.

In September, 2005, the bankruptcy court approved a settlement that included a payout of $6.1 billion, one of the largest of its kind in U.S. history, to approximately 830,000 investors. Funds for the bankruptcy settlement came from the large banks such as Citigroup ($2.58 billion) and JPMorgan Chase ($2 billion) that underwrote or traded WorldCom securities.

1. SEC v. Woodbridge Group, No. 17-cv-24624 (S.D. Fla.); U.S. v. Robert Shapiro,  19-cr-20178 (S.D. Fla.); and In re: Woodbridge Group of Companies, LLC, 17-12560 (Bankr. D. Del.).

In SEC v. Woodbridge Group, the SEC charged a group of unregistered funds and their owner, Robert Shapiro, with defrauding approximately 8,400 retail investor victims, including many elderly people, out of approximately $1.2 billion dollars in a Ponzi scheme. The SEC obtained a penalties and disgorgement order in the amount of $1 billion dollars against Woodbridge and related individual defendants, the proceeds of which were included in a Liquidation Trust formed as part of the related bankruptcy in the District Court for the District of Delaware for distribution to the scheme’s victims. For his role in the fraud, Shapiro was sentenced to 25 years in prison.

1. SEC v. Samuel Bankman-Fried, No. 22-cv-10501 (S.D.N.Y.); and U.S. v. Samuel Bankman-Fried, 22-cv-673 (S.D.N.Y.); and In re: FTX Trading Ltd. et al., 22-11068 (Bankr. D. Del.).

In 2022, the world’s third largest cyptocurrency exchange, FTX, collapsed spectacularly after it became apparent that Sam Bankman-Fried (“SBF”) used customer funds to prop-up his trading fund, Alameda Research, causing billions of dollars in customer losses to thousands of victims in the process. For his and his associates’ fraud, SBF was sentenced to 25 years in prison in March, 2024.  In the subsequent bankruptcy proceeding, In re: FTX Trading Ltd. et al., 22-11068 (Bankr. D. Del. filed Nov. 11, 2022), the court recently ordered the distribution of approximately $16.5 billion through a variety of recovery sources. For example, the CFTC entered into a consent order with FTX providing for payment of $8.7 billion in restitution and $4 billion in disgorgement, which was subordinated to the claims of FTX’s victims. The bankruptcy plan prioritizes smaller, retail investors over other creditors. Customers (with claims of $50,000 or less) received 98% of their claim amounts based on the value of customers’ cryptocurrency holdings at the time of the bankruptcy filing in November 2022.

[1] The bank counterparties have apparently already benefited from a resolution process that saw Achegos’s remaining assets distributed to them pro rata without any allocation for the benefit of the retail investors.  See, e.g., U.S. v. Hwang, 1:22-cr-00240-AKH (S.D.N.Y. filed Dec. 12, 2024) (Doc. No. 365-2) (“Between December 2021 and December 2023, as part of a negotiated settlement that did not involve the defendants, Archegos paid Credit Suisse and its other bank counterparties pro-rated portions of its remaining assets . . . .”).

[2] But see United States v. Ferguson, 584 F. Supp. 2d 447, 448 n.14 (D. Conn. 2008) (denying restitution in large securities fraud case while noting that identifying the total number of shareholder victims that traded shares of AIG on certain days through stockbrokers, many of whom held the shares in coded names to facilitate trading, was so complicated as to be “a prohibitive task.”

[3] Appendix A attached hereto lists a few prominent examples of cases where various forms of restitution have been put in place.