Family Office
Archegos Founder, Ex-CFO Charged With Securities Fraud
The collapse of Archegos, and the fact that it was structured as a family office, encouraged some lawmakers in Congress to call for tighter regulatory oversight of single-family offices, a step that family office industry figures said was misconceived.
The founder of Archegos Capital Management, Bill Hwang, and former chief financial officer Patrick Halligan, were yesterday indicted for securities fraud and racketeering charges. The collapse of Archegos is a saga that raised the specter of a regulatory crackdown on single family offices because Archegos was structured as an SFO.
Archegos collapsed in March 2021, leaving banks with more than $10 billion in losses and sparking calls for more regulatory oversight. More than $100 billion in stock market value vanished in a matter of days. Credit Suisse, Nomura and several other banks, including Goldman Sachs, Morgan Stanley, Citigroup, BNP Paribas, Deutsche Bank and UBS were hit. At Credit Suisse, several C-suite figures, including its risk chief officer, left and were replaced.
According to a report by the Wall Street Journal (April 27), Damian Williams, US attorney for the Southern District of New York, described the purported scheme as historic in scope, alleging that the defendants and their co-conspirators lied to banks in order to obtain billions of dollars in loans, which they then used to inflate the stock price of publicly traded companies.
“The lies fed the inflation, and the inflation fed more lies,” Williams said at a news conference. “Last year, the music stopped. The bubble burst. The prices dropped. And when they did, billions of dollars evaporated overnight,” Williams was quoted as saying.
Hwang and Halligan, who were arrested yesterday morning, face charges including securities fraud, wire fraud and racketeering conspiracy. They pleaded not guilty in a Manhattan federal court yesterday. A federal judge released Hwang on a $100 million bond and Halligan on a $1 million bond.
Hwang’s lawyer Lawrence Lustberg said in a statement that his client is entirely innocent and that there is no evidence whatsoever that he committed any kind of crime.
Two other former Archegos employees, William Tomita, who was Archegos’s head trader, and Scott Becker, who was its chief risk officer, have pleaded guilty for their roles in the alleged scheme and are cooperating with the government, prosecutors said.
As Archegos was structured as a family office it meant that certain federal regulations did not apply. Hwang built up large, concentrated positions in companies and held some investments in a mix of cash and swaps, derivative contracts struck with banks for a fee, with money borrowed from banks across Wall Street. Hwang favored total-return swaps that gave Archegos the profits and losses on the stocks underlying the swap contracts while its lenders held the securities.
Prosecutors said that Hwang’s use of swaps allowed him to manipulate the prices of stocks in his portfolio because the agreements prompted Wall Street firms to buy shares of the stocks too. As the size of Archegos’s swaps grew, so did the number of shares bought by the Wall Street firms, pushing up prices in the process. Prosecutors also allege that Archegos traded at certain times of day and in other manipulative ways to prop up stocks in its portfolio, and to prevent share prices from falling too much.
The collapse of Archegos, and the fact that it was structured as a family office, encouraged some lawmakers in Congress to call for tighter regulatory oversight of single-family offices, a step that family office industry figures said was misconceived and would miss the core of the problem. The Archegos affair has brought unwelcome attention to family offices, a sector that has traditionally shunned publicity.
A year ago, Dan M Berkovitz, commissioner, at the Commodity Futures Trading Commission, called for tighter regulatory oversight of family offices.
A few hedge fund tycoons, such as George Soros and Steve Cohen, have morphed their firms into family offices over the past decade, albeit for different reasons. (See here for a roundup.)