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On June 11 2020, Bill Hwang received a text message from an investment analyst at his family office, Archegos Capital Management, which had quietly become one of Wall Street’s largest stock trading operations. One of Archegos’ biggest positions, the stock of ViacomCBS, had held up well on a down day in the market and the analyst wanted to ask if the price improvement was “a sign of strength?”
Hwang didn’t think so.
“No,” Hwang responded in a text message. “It is a sign of me buying.” Hwang followed the declaration with an emoji.
Indeed, Hwang’s trading operation purchased 82.1 million shares of ViacomCBS on June 11, 2020, representing 17% of the day’s trading volume. The details of the text messages and stock trades were included in a 59-page indictment that federal prosecutors in Manhattan unsealed on Wednesday. The indictment charges Hwang and Patrick Halligan, Archegos’ chief financial officer, with market manipulation and conspiracy to defraud some of the world’s most sophisticated banks.
The indictment and an accompanying regulatory complaint give the most detailed picture of the shocking March 2021 blowup of Archegos, which defaulted on trading margin loans it had secured from huge banks like Credit Suisse
CS,
Nomura Holdings
8604,
Goldman Sachs
GS,
and Morgan Stanley
MS,
Archegos’ collapse rattled markets and dealt billions of dollars in losses to some of the banks. It also raised questions about the lack of regulation of family offices, like Archegos, which had become a massive market participant that few people even on Wall Street knew existed. It held huge positions, often through derivatives instruments, in big stocks like Netflix and Amazon that were never disclosed in any regulatory filings.
Even today, the scope of Archegos remains stunning. According to the indictment, Hwang’s personal fortune grew from $1.5 billion to $35 billion without the public knowing, and the leverage drove the size of Archegos’s market positions to $160 billion. “Despite the size of Archegos’s positions, the investing public did not know that Archegos had come to dominate the trading and stock ownership of multiple companies,” federal prosecutors said.
The indictment lays out how Hwang worked to manipulate the trading of stocks, like ViacomCBS , Discovery Communications, Tencent Holding , Baidu
BIDU,
and GSX Techedu. But it also paints a picture of a man whose trading practices changed dramatically around March 2020, when Archegos only had $1.6 billion in invested capital, and Hwang shifted away from a buy-and-hold strategy driven by deep security analysis to an effort to corner stocks and drive-up prices with size and brute force. Securities regulators describe Hwang “sidelining his research operations, ignoring their stock price targets in favor of his own outsized stock price targets” that were based on little to no analytical support.
Particularly from January 2021 to March 2021, securities regulators say, Hwang timed Archegos’s trading to maximize impact, by engaging in pre-market trading “setting the tone” for the trading day, inducing other traders to buy certain stocks, and trading in the last 30 minutes of the trading day. With fee-hungry bankers ready to help, federal prosecutors say Hwang and Archegos were transformed “into significant economic forces in the United States securities markets.” A lawyer for Hwang, who lives in Tenafly, N.J., has said he denies wrongdoing.
‘Are we going to be able to pay for these trades today? I don’t see how we can’
Sung Kook “Bill” Hwang was a Tiger Cub, a term used for the hedge funds launched by the former analysts who worked for Julian Robertson, the legendary hedge fund pioneer and founder of Tiger Management. Robertson backed his proteges as they launched firms like Tiger Global Management, Coatue Management, and Viking Global Advisors that now are now among the biggest hedge funds on the planet and known for long/short equity strategies that in recent years often revolved around technology companies.
Hwang was once one of the biggest Tiger Cubs. He launched Tiger Asia Management in New York to trade stocks in markets like Hong Kong, Korea and Japan, and managed as much as $8 billion, mostly for clients. But Tiger Asia suffered heavy losses during the 2008 financial crisis and the firm was charged and convicted by the U.S. government over insider trading issues in 2012 related to trades Tiger Asia conducted in Hong Kong.
With the money he had left, Hwang opened his family office, Archegos, in 2013, and started trading technology stocks that were listed in the U.S. as opposed to Asia, partly because he was banned from trading in Hong Kong. Because family offices do not have to register with the Securities & Exchange Commission, Hwang’s operations, which employed more than 50 people and paid consultants, were no longer public.
A deeply religious man, Hwang, however, left clues of his trading behavior in the tax filings of his foundation geared toward Christian causes. It showed that Hwang made a fortune buying and holding for years the stocks of the hottest tech companies, like Netflix, Amazon and LinkedIn. He got the idea to invest in Netflix from Cathie Wood, the CEO of Ark Invest , who said in a CNBC interview that she met Hwang at a church. Like Hwang, Wood has run an aggressive investment strategy focused on high-growth technology names. For years, Hwang ran an even more highly concentrated portfolio and, eventually, the big banks were enticed to lend to him again despite his legal track record. He used total return swaps to avoid regulatory rules that require public disclosure of large ownership in individual securities and also started trading American Depositary Receipts of Asian companies that traded on U.S. exchanges.
The way federal prosecutors describe it, Hwang’s behavior changed dramatically in March 2020, just as markets started to rebound following the initial COVID-19 lockdowns. He dramatically pushed the leverage of his portfolio and his use of derivatives instruments, and used his increased market power, largely hidden from public view, to support and defend the prices of specific stocks through manipulative trading strategies, federal prosecutors say. Hwang increased the demand for certain shares and decreased their supply. The basis for the criminal case made by federal prosecutors is that Hwang had Archegos mislead the world’s most sophisticated banks to obtain more leverage and further push these strategies.
By 2021, Hwang owned as much as 50% of the outstanding shares of companies like ViacomCBS
PARA,
and GSX
GOTU,
without market participants knowing, prosecutors say. He would trade large quantities of those shares on a daily basis, creating unusually large upward price swings, making sure to defend stocks like GSX against short sellers who were betting on the stock’s decline. At one point, Archegos accounted for 35% of the daily trading volume of Discovery Communications stock
WBD,
the federal indictment says. Securities regulators say that Hwang would bid up prices with incrementally higher limit orders throughout the trading day, especially in the last 30 minutes of the trading day. Shares of Discovery Communications and ViacomCBS rose by 250% between October 2020 and March 2021, far outpacing most tech stocks.
But even Hwang could not “defend” the share price of ViacomCBS in March 2021, when the company decided to issue $2.6 billion of shares. The stock offering sparked a violent sell off of ViacomCBS’s stock that Hwang could not stop despite what federal prosecutors describe as Hwang’s “extraordinary amount of trading,” using $900 million that ate up a large amount of Archegos’s available cash.
“Are we going to be able to pay for these trades today? I don’t see how we can,” Halligan, Archegos’s CFO, is described in the indictment as saying. The banks started making margin calls and Archegos collapsed when it could not meet them. As the banks unwound the trades, the underlying stocks fell.
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