The Securities and Exchange Commission (SEC) charged Sung Kook (Bill) Hwang, the owner of Archegos Capital Management, with orchestrating a fraudulent scheme that resulted in billions of dollars in losses.
From at least March 2020 to March 2021, Hwang purchased on margin billions of dollars of total return swaps, the SEC alleges. These security-based swaps allow investors to take on huge positions in equity securities of companies by posting limited funds upfront. The SEC alleges that Hwang frequently entered into certain of these swaps without any purpose other than to artificially drive up the prices of the various securities. This, in turn, induced other investors to purchase those securities at inflated prices.
As a result of Hwang’s trading, Archegos allegedly experienced a period of rapid growth. Its value increased from approximately $1.5 billion with $10 billion in exposure in March 2020 to more than $36 billion with $160 billion in exposure at its peak in March 2021.
The complaint also alleges that Archegos misled many of Archegos’s counterparties about its exposure, concentration and liquidity to get increased trading capacity so that Archegos could continue buying swaps to drive up the price of those stocks.
Ultimately in March 2021, price declines in Archegos’s most concentrated positions allegedly triggered significant margin calls that Archegos was unable to meet. Archegos’s subsequent default and collapse resulted in billions of dollars in credit losses among Archegos’s counterparties.
“Today, we charged Archegos Capital Management and affiliated individuals with committing fraud and manipulating stock prices using total return swaps. The collapse of Archegos last spring demonstrated how activities by one firm can have far-reaching implications for investors and market participants,” SEC Chair Gary Gensler said. “The failure of Archegos underscores the importance of our ongoing work to update the security-based swaps market to enhance the investor protections, integrity, and transparency of this market. Further, I encourage prime brokers and other market participants to remain vigilant to the risks presented by counterparty relationships.”
The SEC also charged Archegos’s chief financial officer, Patrick Halligan; head trader, William Tomita; and chief risk officer, Scott Becker for their roles in the fraudulent scheme.
The complaint, filed in federal district court in Manhattan, charges Hwang and the other defendants with violating antifraud and other provisions of the federal securities laws. The SEC is seeking permanent injunctive relief, return of allegedly ill-gotten gains, and civil penalties. Also, the SEC is seeking to bar the defendants from serving as a public company officer and director.
In parallel actions, the U.S. Attorney’s Office for the Southern District of New York announced criminal charges for similar conduct, and the Commodity Futures Trading Commission (CFTC) announced civil charges.