Until a few days ago, Bill Hwang and his lawyers had thought they would be able to persuade federal authorities not to file criminal charges over last year’s implosion of his $10 billion private investment firm, a trading debacle that caused billions of dollars in losses for Wall Street banks.
But those efforts failed as federal agents on Wednesday morning arrested Mr. Hwang, the owner of Archegos Capital Management, and his former chief financial officer, and charged them with orchestrating a stock manipulation scheme that relied on them masking and concealing the enormous risk the firm had taken on.
Mr. Hwang and his former top lieutenant, Patrick Halligan, were arrested at their homes and are expected to appear in Manhattan federal court on Wednesday. The arrests were announced by Manhattan federal prosecutors, who released a 59-page indictment against the men.
Prosecutors said the men were charged with racketeering conspiracy, securities fraud and wire fraud in connection with a scheme to manipulate the prices of stocks in order to boost returns, and in the process hurt other investors. They said the plan, which relied heavily on leverage, or borrowed money, helped pump up the firm’s portfolio to $35 billion from $1.5 billion in a single year, and at one point Archegos effectively controlled $160 billion in a small basket of stocks.
But Archegos’s footprint in the market was all but invisible to regulators, investors and even to the big Wall Street banks that had financed its massive trades, authorities said. That’s because Archegos conducted those trades using sophisticated financial instruments called swaps that allowed Mr. Hwang to bet on the direction of stock prices without actually owning those shares.
The collapse of Archegos shocked Wall Street and led to investigations by federal prosecutors, the Securities and Exchange Commission and other regulators. The S.E.C. filed its own civil complaint on Wednesday against Mr. Hwang, Mr. Halligan and two former traders at Archegos. In addition, the Commodity Futures Trading Exchange filed its own civil complaint over the matter.
Lawrence Lustberg, a lawyer for Mr. Hwang, said the indictment “has absolutely no factual or legal basis” and said his client was “entirely innocent of any wrongdoing.” Mr. Lustberg called the allegations against his client “overblown” and added that Mr. Hwang has had numerous voluntary meetings with federal prosecutors in Manhattan to discuss the matter, including one this week. Mr. Hwang was arrested at his home in Tenafly, N.J.
Mary Mulligan, a lawyer for Mr. Halligan, said her client “is innocent and will be exonerated.”
The arrests would be one of the biggest Wall Street white-collar prosecutions in years. The Archegos collapse put a spotlight on large family offices, which manage the money of wealthy individuals and their close relatives. Although they can engage in just as much trading as hedge funds, they operate with less regulatory oversight because they do not use the money of outside investors like pensions, foundations and other wealthy individuals.
The losses at Archegos were compounded by the use of a derivative called a total return swap, which is a complex security sold by banks that allows a firm to use borrowed money to buy stocks. The derivative allowed Archegos to quickly take on much larger positions in stocks than it normally would be able to if it were buying stocks with cash. The swaps also allowed Archegos and Mr. Hwang to avoid having to disclose its large positions in a handful of stocks to regulators and other investors.
In its civil complaint, the S.E.C. said the attempts by Mr. Hwang and his firm to mask their buying power posed a risk not only to the banks that extended them credit but also to other investors, who may have bought stocks like ViacomCBS, Discovery and the Chinese education company GSX Techedu at inflated prices.
Mr. Hwang knew that Archegos could affect markets simply through the exercise of its buying power, the complaint said. It said that in June 2020, an Archegos employee asked Mr. Hwang if the rising price of ViacomCBS shares was a “sign of strength.” Mr. Hwang responded: “No. It is a sign of me buying,” followed by a laughing emoji.
The indictment filed against Mr. Hwang and Mr. Halligan said they and others at the firm made “materially false and misleading statements” to the big banks that arranged the derivative trades and allowed them to effectively accumulate huge positions in stocks using billions in borrowed money.
The plan initially worked, as it pumped up the effective size of the stock positions held by Mr. Hwang’s family office to $160 billion from $10 billion — which had it rivaling some of the biggest hedge funds in the world. But things quickly fell apart in March 2021, when sharp declines in a few stocks in Archegos’s portfolio led the banks to issue margin calls. These forced the banks to sell securities and take control of collateral that the firm had posted in exchange for its big borrowings.
The investigations into the collapse of Archegos began soon after the firm imploded. The collapse led to billions in losses for a number of banks including Credit Suisse, Nomura, Morgan Stanley and UBS. Credit Suisse incurred the most pain, losing more than $5 billion, and the trading debacle led to a number of top-level management changes at the bank.
Over the past few months, federal authorities have demanded documents from the firm and banks and had meetings and interviews with a number of former employees at Archegos, including Mr. Hwang.
The indictment names two former Archegos employees as part of the scheme, Scott Becker and William Tomita. But it was not clear if they would also be charged or are cooperating with the investigation.
Mr. Becker, the former chief risk officer at Archegos, and Mr. Tomita, the firm’s former top trader, were charged by the S.E.C. along with Mr. Hwang, Mr. Halligan and the firm itself.
The S.E.C. complaint filed on Wednesday said that Mr. Becker and Mr. Tomita typically led discussions with the banks about the firm’s trading positions. But authorities said that Mr. Hwang and Mr. Halligan directed and set the tone for those discussions.
Authorities said it was understood by Mr. Becker and Mr. Tomita that if they were truthful with the banks about the amount of risk Archegos was taking on, the financial institutions would not keep arranging new derivatives trades for it.
Lawyers for Mr. Becker and Mr. Tomita did not respond to requests for comment.
The collapse of Archegos has spurred calls for more disclosure by large family offices to the S.EC. and greater transparency in the derivatives market so regulators can better gauge the kind of risk that traders and banks are taking on.
In a statement, Gary Gensler, the S.E.C. chairman, said the collapse of Archegos “underscores the importance of our ongoing work to update the security-based swaps market to enhance the investor protections.”
This is the second time Mr. Hwang has run into trouble with regulators. In 2012, he reached a civil settlement with U.S. securities regulators in a separate insider trading investigation involving his former hedge fund and was fined $44 million. Mr. Hwang was barred from managing public money for at least five years. Regulators formally lifted the ban last year.
Lananh Nguyen contributed reporting.
April 27, 2022
A previous version of this article misstated Credit Suisse’s loss. It was $5 billion, not $5 million.