Federal agents arrested Bill Hwang, the owner of Archegos Capital Management, the $10 billion private investment firm that imploded last year in a trading debacle, and his former chief financial officer on Wednesday morning.
Mr. Hwang and his former top lieutenant, Patrick Halligan, were arrested at their homes and are expected to appear in Manhattan federal court later today. The arrests were announced by Manhattan federal prosecutors who unveiled a 59-page indictment against the two men.
Federal prosecutors said the men were charged with racketeering conspiracy, securities fraud and wire fraud in connection with a scheme to manipulate the prices of publicly traded stocks in order to boost returns. They said the plan, which relied heavily on leverage, helped pump up the firm’s portfolio to $35 billion from $1.5 billion in a single year.
The collapse of Archegos shocked Wall Street and caused major losses for big banks 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.
Larry Lustberg, a lawyer for Mr. Hwang, confirmed the early morning arrests but declined to immediately comment. 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 operate with less regulatory oversight than hedge funds but sometime do just as much trading.
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 was just 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.
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.
The indictment refers to two former traders who worked at Archegos as part of the scheme. But it was not clear if those former traders would also be charged or are cooperating with the investigation.
The collapse of Archegos has spurred calls for more disclosure by large family offices to the S.EC.
