Former hedge fund manager, who caused billions in losses for CS and other banks, must pay for his risky bets.
Bill Hwang, founder of the family office Archegos, has been found guilty of fraud and market manipulation by a New York jury.
The “Archegos” leads and is a role model for others – at least that’s how it was intended in ancient times. In modern investment banking, the nuances of the Greek language were lost: Those who followed the call of Archegos Capital Management in 2021, the financial vehicle of Bill Hwang, were not led into the light, but into ruin.
A New York jury has now found Hwang guilty of fraud and market manipulation. One of the biggest financial scandals of the last fifteen years has reached a milestone, although its end has not yet been found.
The Angel of Death for Credit Suisse
The former Wall Street trader Bill Hwang bet with enormous sums borrowed from banks on a few stocks, driving their prices up. Within a few months, he was able to multiply his investment and reach dizzying heights. When the value of key stocks Hwang bet on plummeted in March 2021, Archegos collapsed. The family office’s bankruptcy resulted in over $10 billion in losses for the involved investment banks and briefly sent shockwaves through the financial system.
Credit Suisse suffered the most, losing $5.5 billion due to Archegos; this massive shortfall accelerated the loss of trust among CS customers and consequently the bank’s decline. But UBS also lost around $800 million in its dealings with Archegos.
The jury in New York found the 60-year-old guilty of defrauding these two and other banks and manipulating stock prices, as reported by multiple media outlets. The jurors largely agreed with the arguments put forth by the federal prosecutors. Patrick Halligan, the former CFO of Archegos, was also convicted.
Hwang’s sentence will be announced on October 28, and until then, he remains free on bail. The verdict can be appealed. Halligan’s lawyer told the Wall Street Journal that they plan to appeal.
One deceived…
The trial against Hwang attracted attention because Archegos had exploited the risk management of numerous major banks to finance its billion-dollar bets. Some banks, including Credit Suisse, adjusted their risk management processes following the debacle. However, the question remained: How did Hwang manage to deceive some of the supposed best bankers in the world?
For the New York prosecutors, the answer was clear: by blatantly lying to them. Hwang worked with a number of banks, and none knew how much credit Hwang had outstanding at the other banks.
Archegos representatives also failed to disclose that they were using the borrowed billions for very concentrated bets, significantly increasing the default risk, which could have been interpreted by the banks as a warning signal. Hwang also invested in his selected stocks through equity swaps, allowing him to hide his footprint in the market and from regulators.
…while others were deceived
Hwang’s defense argued that the evangelical Christian and former Wall Street trader was simply very convinced of the potential of the stocks he had invested in. Hwang himself never lied to the banks; it was his employees who did. The defense also accused the prosecutors of not being able to explain plausibly how Hwang would have profited from the huge positions he built with borrowed money.
In fact, many observers were unclear about how Hwang envisioned exiting his positions. Because as soon as he started to unwind, stock prices would have faltered, and the house of cards would likely have collapsed.
However, the prosecution was able to present two key witnesses, the former risk chief and former head trader of Archegos. Both had previously pleaded guilty, cooperated with federal prosecutors, and detailed how the Archegos system had operated.
As a result, the defense’s arguments did not sway the jurors. While the jury did not buy their accusation that the banks had voluntarily thrown themselves at Hwang to profit from his golden bets, some bank managers following the trial may have felt uneasy. They know that without the gullible banks, the already convicted Hwang could never have built his house of cards.
The “Archegos” did not lead them to wealth – but perhaps to a valuable lesson for their future careers.
The “Archegos” did not lead them to wealth – but perhaps to a valuable lesson for their future careers.