May 6, 2024

Trial of Former Archegos Trader and Historic Stock Manipulator Bill Hwang

To: Interested Parties
From: Dennis Kelleher, President and CEO (Media Contact: Madeline Tucker, Press Secretary, mtucker@bettermarkets.org)
Date: May 6, 2024
Re: Trial of Bill Hwang, Former Hedge Fund Trader at Disgraced Archegos Capital Management, for Alleged Historic Criminal Stock Manipulation and Fraud Scheme

Introduction. On May 8, 2024, Bill Hwang, head of a “family office” investment fund known as Archegos, is scheduled to go on trial for allegedly orchestrating a massive market manipulation. It caused huge losses among investors and banks, shook the financial markets, and highlighted major regulatory vulnerabilities in our financial system. The descriptions of the events set forth here are drawn largely from the allegations in the government’s April 25, 2022, indictment, which paints a compelling picture of a scheme that, if proven, would represent a major episode of financial wrongdoing.

The scandal shows that the recklessness of a single firm can jeopardize the stability of our financial markets and the livelihoods of millions of Americans. As we have repeatedly stated for years, it is essential that behavior such as the crime spree allegedly orchestrated by Bill Hwang, if established at trial, be severely punished, both to hold wrongdoers accountable and to deter other potential wrongdoers from engaging in similar illegal conduct. The trial will serve as another test of whether, and to what extent, wealthy financiers can be effectively and personally held accountable in our criminal justice system.

The Archegos incident also starkly exposed problems in the way our markets work and the gaps in the regulations that govern them, including the risks arising from highly leveraged trading strategies, as well as the lack of transparency around the activities of family offices like Archegos, which are not subject to the same regulatory requirements as hedge funds or other financial institutions. It also highlighted the potential systemic risks posed by the interconnectedness of the financial system, as the losses at Archegos had ripple effects on the stock prices of the companies involved and raised concerns about the stability of the banking system. Overall, the Archegos debacle serves as a cautionary tale not only about greed and illegality but also about the dangers of excessive leverage and the need for greater oversight of opaque investment vehicles like the Archegos investing firm and the derivatives it used as a tool for manipulation.

Background. Bill Hwang is a former hedge fund manager who founded Archegos Capital Management, a family office that managed the wealth of Hwang, his family, and employees. The pending prosecution is not his first encounter with law enforcement. In 2012, Tiger Asia Management and Hwang admitted to illegally using inside information to trade Chinese banks’ stocks, and agreed to criminal and civil settlements totaling more than US$60 million. Tiger Asia Management, Hwang, and others also paid US$44 million in penalties to the Securities and Exchange Commission. In 2014, Hwang was banned from trading in Hong Kong for a period of four years.

The Scheme, According to the Indictment. In this case, Hwang is alleged to have perpetrated a massive market manipulation scheme with multiple layers, including multiple acts of fraud. According to the indictment, he lied to major Wall Street banks to secure and retain billions of dollars in financing and used stock purchases along with derivatives to acquire, and at the same time hide, huge positions designed to pump up the stock prices of a number of public companies, particularly in the tech and media sectors. The bubble burst when those stock prices started to fall. Archegos had built up enormous positions through the use of derivatives called “total return swaps,” which allowed the firm to gain—and conceal—significant exposure to stocks without actually owning them. However, when the value of those positions declined sharply, it triggered margin calls from the banks that had extended credit to Archegos.

As the banks demanded more collateral to cover the losses, Hwang initially decided to engage in a flurry of additional buying in a vain attempt to reverse the downward slide in the prices for the stocks he was manipulating. In the process, he also ramped up the campaign of deception, deliberately misleading the banks about the composition of the Archegos portfolio and the cash position and financial condition of Archegos. These manipulative trading patterns and deceptions failed. Stocks slid further, the margin calls from the banks continued, and Archegos was unable to meet those margin calls, leading to a cascade of forced liquidations of Archegos’s positions. This caused a further drop in the prices of the stocks involved, exacerbating the losses for both Archegos and the banks. According to the indictment, “More than $100 billion in apparent market value for nearly a dozen companies disappeared within days.” Hwang was reported to have lost billions of dollars in a matter of days. The Wall Street Journal reported that Hwang lost $8 billion in 10 days, while Bloomberg News reported that Hwang lost $20 billion in 2 days. In any case, the scandal highlighted the enormous amount of financial risk some traders were able to introduce into the financial system by using their leveraged trading strategies.

The Cascading Damage. The collapse of Archegos allegedly inflicted widespread financial harm. As explained in the indictment, market participants who purchased the relevant stocks at artificial prices lost the value they believed their investments held, the banks lost billions of dollars, and Archegos employees, many of whom were required to invest 25% or more of their bonuses with Archegos as deferred compensation, lost millions of dollars. The scandal ultimately contributed to the collapse of Credit Suisse.

The Hallmarks of a Vast, Intentional, and Destructive Scheme. Considering all the factors that reveal the scope, scale, and impact of any allegedly fraudulent scheme, this one was historic. Judging from the information in the indictment, it spanned a year or more in the planning and execution; it was fully intentional; it was egregious by nature, involving elaborate market manipulation and acts of fraud; and it was aimed at generating billions of dollars of profits for the benefit of Hwang and his family office, at the expense of the markets, investors, and banks. It is equally clear, based on the indictment, that Hwang orchestrated and controlled the scheme through his own actions and those who followed his orders—all of it against a backdrop of Hwang’s history of prior acts of fraud in the financial markets.

The Prosecution. On April 25, 2022, the Department of Justice indicted Bill Hwang and three others on charges of racketeering conspiracy, securities fraud, market manipulation, and wire fraud offenses, each of which carries a potential sentence of 20 years in prison. As the government put it in its indictment, Bill 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.”

Lessons Learned. The Archegos debacle did not occur in a vacuum. It was enabled by lax regulatory policies that have allowed excessive risk into our financial markets. As Better Markets has advocated for years, there are a number of policies that could have prevented the Archegos scandal and that going forward can reduce the likelihood of such a scandal reoccurring in the future. For example:

Including derivatives in short sale reporting. As Better Markets explained in its April 2022 comment letter submitted to the SEC in response to the agency’s proposal to bring more transparency to short selling activity (“Short Position and Short Activity Reporting by Institutional Investment Managers”), we have long believed that the SEC needed to remove the loopholes that allowed investment managers to exclude derivatives positions that are functionally equivalent to short positions from the calculation of the reporting threshold. As we explained in our comment letter, if the SEC were to fail to close this loophole, many managers would likely shift their direct short positions into derivatives positions that pose the same risks and concerns but continue to be hidden from view — as Bill Hwang at Archegos is alleged to have done with respect his long positions. Fortunately, the SEC addressed these concerns when it finalized its rule on Short Position and Short Activity Reporting by Institutional Investment Managers in October 2023. Under the new rule, institutional investment managers that meet or exceed certain specified reporting thresholds are required to report, on a monthly basis using the related form, specified short position data and short activity data for equity securities, and account for derivatives that affect the reported short positions.
Reporting of large SBS positions. In August 2023, Better Markets filed a comment letter in response to the SEC’s reopened rule proposal to require public reporting of large security-based swap (SBS) positions. The new rule, Rule 10B-1, would require any person with a security-based swap position that exceeds a certain threshold to promptly file with the Commission a schedule disclosing, among other things:

“the applicable security-based swap position;
“positions in any security or loan underlying the security-based swap position; and
“any other instrument relating to the underlying security or loan, or group or index of securities or loans.”

In our comment letter, we noted that the SBS market continues to pose risks to the broader financial system. We noted how this was clearly illustrated in March 2021 when the hidden bets of Archegos and Hwang exploded, causing huge losses for some banks, driving down the stock prices of several companies and severely rattling markets. The Archegos meltdown confirmed the need for additional transparency in the SBS market, and the SEC’s reopened proposal would help ensure that large SBS positions are publicly reported. That information will better equip investors and regulators to identify and respond to the buildup of potential risks in the markets.

Antifraud provisions in SBS trading. In a March 2022 comment letter to the SEC regarding the Commission’s proposed rules prohibiting fraud and manipulation in security-based swaps, Better Markets critiqued the SEC for introducing a safe harbor in the proposed rule, prompted by industry concerns that the anti-fraud and anti-manipulation rules could cover the innocent exercise of non-volitional rights or obligations under a security-based swap following the acquisition of material non-public information. The new rule proposed to prohibit fraud and manipulation in the exercise of the ongoing rights and obligations that are unique characteristics of security-based swaps—an important adjunct to the general anti-fraud protections in the securities laws. However, industry concerns about the potential overbreadth of the rule led the SEC to include an affirmative defense that weakened the final rule. However, as we pointed out in our comment letter, these concerns are unfounded and the defense was unnecessary. Worse, this provision threatens to insulate culpable acts of fraud carried out through the use of material non-public information.
Transparency in beneficial ownership reporting. In March 2022, the SEC proposed to adopt amendments to the rules that govern beneficial ownership reporting. In a comment letter supporting the rule, Better Markets argued that the rule would enhance transparency and market stability by ensuring that certain types of derivatives holdings count toward the level of beneficial ownership required to be reported. And as we noted in our press release at the time, we know from the Archegos debacle that derivatives can be used to acquire massive, highly leveraged, and systemically dangerous accumulations of interests in companies, all of which should be subject to greater transparency. Fortunately, the SEC’s rule to modernize beneficial ownership reporting, finalized in October 2023, will help to reduce the risk of another Archegos-like crisis from occurring by requiring market participants to provide more timely information on their positions, including interests in all derivative securities (including cash-settled derivative securities) that use the issuer’s equity security as a reference security.
Reforming family offices. The Archegos scandal was also enabled by the so-called “family office loophole,” which exempts family offices from regulation as investment advisers under the Investment Advisers Act of 1940. Given the enormous growth of family office investment firms in recent years, the relative lack of oversight and scrutiny that family offices receive compared to traditional hedge funds is cause for concern. The stock arguments in opposition to greater oversight, including the notion that the investors in such funds don’t need protection because of their wealth and supposed sophistication, are not persuasive. That sophistication is largely a myth, and massive losses from mismanagement or illegal conduct can certainly overwhelm the resources of even the most affluent investors.

The Critical Role of Law Enforcement. As we have said before, if the white-collar crime spree is to be ended, justice must be served from the suites to the streets. Unfortunately, enforcement against white-collar financial crime is often so infrequent, ineffective, and weak that it virtually rewards past lawbreaking and incentivizes future lawbreaking. To combat Wall Street’s rampant crime spree, prosecutors must seek punishments that fit the crime and meaningfully sanction individual executives and supervisors personally. This case is a good example of doing just that: it seeks to hold three senior individuals alleged to have committed serious violations of the law, with devastating consequences for many, personally accountable under the criminal laws.

Other Resources. Other Better Markets advocacy relating to the issues raised by the Archegos trading scandal include the following:

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