Founding of Archegos Capital… “Defrauding banks caused economic disaster”
Law: “If you do not live by the law, you will be severely punished by the law.”
Korean investor Bill Hwang (Korean name Hwang Seong-guk), who was a party to the ‘Arkegos margin call (additional margin request) incident’ that shook the U.S. Wall Street in 2021, was sentenced to heavy punishment by a federal court.
According to the Wall Street Journal (WSJ) on the 20th (local time), Judge Alvin Hellerstein of the Southern District Court in Manhattan, New York, USA, sentenced Hwang, who was indicted on charges of securities fraud and market manipulation, to 18 years in prison.
Judge Hellerstein said of the ruling, “It is a symbol that shows others that if you do not live by the law, you can be punished very severely by the law.”
Mr. Hwang, who appeared at the trial wearing a dark gray suit on this day, remained calm during the trial. He said in court before sentencing, “I feel deep pain for all Archegos employees, the bank, and the people who worked at the bank.”
Last July, a federal jury in New York found him guilty on 10 charges, including fraud and racketeering, and prosecutors sought 21 years in prison for him.
The prosecution pointed out that Mr. Hwang “used lies and manipulative trading strategies to defraud banks and manipulate the stock market to his advantage.”
He also emphasized, “This plan distorted the market prices of minority securities, causing an economic disaster due to a predictable collapse.”
However, Mr. Hwang’s lawyer argued that his transaction instructions were legal, saying, “Mr. Hwang did not make any false statements to any bank.”
In particular, Mr. Hwang protested that he had no intention of fraud or stock price manipulation because he invested based on the value of the stocks he was investing in. In addition, it was said that Mr. Hwang invested with his own money, not with his customers’ money.
Mr. Hwang, the founder of Archegos, is suspected of illegally manipulating the prices of securities in the Archegos portfolio and attempting to gain profits by defrauding investment banks.
Market prices were manipulated to greatly inflate the size of Archegos’ assets, ultimately causing a loss of more than $10 billion (approximately KRW 13.99 trillion) to lenders.
Mr. Hwang and Archegos invested $50 billion (approximately KRW 69.935 trillion) in various bank stocks in 2020 using derivatives such as total return swaps (TRS). The amount was more than five times the assets held by Archegos at the time.
Then, in early 2021, investment stock prices plummeted and a problem arose.
After the stock price plummeted, they were unable to respond to margin calls requiring additional margin, resulting in large losses. Morgan Stanley, Nomura, etc. suffered a total loss of $10 billion due to this incident.
Credit Suisse (CS), which suffered losses worth $5.5 billion due to this incident, was embroiled in rumors of a crisis and was eventually acquired by its domestic competitor, UBS.
Afterwards, the Southern District of New York Prosecutor’s Office indicted Hwang, along with Chief Financial Officer (CFO) Patrick Halligan, on charges of securities fraud and financial fraud on April 27, 2022.
Meanwhile, Mr. Hwang is a disciple of Julian Robertson, who led Tiger Management, a legend in the American hedge fund industry, and is known to have been called ‘Tiger Cubs’ on Wall Street.
In 2001, with the support of Robertson, he established ‘Tiger Asia Management LLC’.
At the time, the company was headquartered in New York and had become one of Asia’s largest hedge funds, managing more than $5 billion. However, in 2012, he was fined $44 million for trading Chinese bank stocks using insider information.
Bill Hwang later made a comeback by founding Archegos Capital, but became a public figure on Wall Street due to the ‘margin call’ incident.
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How could the Archegos Capital case affect future regulations for family offices and hedge funds?
Time.news Interview: The Archegos Capital Case — Consequences and Legal Implications
Editor: Welcome to Time.news! Today, we’re diving deep into one of the most significant financial scandals in recent history: the collapse of Archegos Capital. We’re joined by financial expert Dr. Emily Chen, a professor of finance at the Wharton School of Business and a specialist in market manipulation and regulatory issues. Dr. Chen, thank you for joining us.
Dr. Chen: Thank you for having me. It’s a pleasure to be here.
Editor: Let’s start with the basics. Bill Hwang, the founder of Archegos Capital, was recently sentenced to 18 years in prison for fraud and market manipulation. What led to this severe punishment from the court?
Dr. Chen: The case of Archegos Capital is a notable example of what can happen when market activities cross the line into illegal practices. Hwang was found guilty on multiple counts, including securities fraud and racketeering. The key issue here was the allegation that he used deceptive trading strategies to inflate the value of Archegos’ assets and manipulated the stock prices of various securities in his portfolio, causing significant losses to investment banks — over $10 billion in total. The judge’s statement highlighted the importance of legal compliance, serving as a warning to others in the financial industry.
Editor: It seems that the scale of the losses was immense. Can you elaborate on the ripple effects that the Archegos collapse had on the financial markets?
Dr. Chen: Absolutely. Hwang’s activities not only impacted the firms he directly defrauded but also had wider implications for the market itself. When Archegos’ inflated positions crumbled, it caused a massive margin call, which led several banks to sell off their stakes at fire-sale prices. The resulting panic and uncertainty affected investor confidence, especially in the sectors of the stocks Hwang traded. This event triggered discussions about the risks of allowing family offices, like Archegos, to operate with minimal oversight, ultimately impacting regulatory conversations.
Editor: There was also a defense implying that Hwang operated within legal boundaries; he claimed he believed his transactions were legitimate. How does that contention fit within the broader context of fraudulent activities in financial markets?
Dr. Chen: That’s a crucial point. Hwang’s defense argued that he acted based on the perceived value of the stocks rather than engaging in fraudulent conduct. However, intent is a key variable in determining the legality of financial practices. The court found that his manipulative strategies amounted to a fraudulent scheme, indicating that regardless of his perceived intentions, the impact of his actions violated the law. The legal standard focuses on the outcome and the effects on the market rather than subjective views of legality.
Editor: Some critics argue that this case signals a need for a reevaluation of regulations surrounding hedge funds and family offices. Do you believe more stringent regulations are necessary?
Dr. Chen: Yes, there is certainly momentum for that view. The Archegos case has illuminated vulnerabilities in our current regulatory framework concerning family offices and investment firms that have less scrutiny compared to traditional hedge funds. Advocating for greater transparency and compliance can help mitigate risks and protect the market from potential abuses. This incident may act as a catalyst for regulatory changes designed to enforce stricter oversight on similar entities moving forward.
Editor: It’s fascinating how one case can provoke such a broad spectrum of discussions around finance and regulation. Before we wrap up, what do you believe will be the lasting implications of the Archegos episode on the financial industry?
Dr. Chen: The lasting implications will likely revolve around heightened regulatory scrutiny and a renewed focus on risk management practices. Investors and financial institutions will also be more cautious about their exposure to family offices and less transparent funds. This scenario has served as a warning: the intertwining of ambitious trading strategies and market manipulation can have catastrophic results. Ultimately, it may lead to a safer, albeit less profitable, environment that compels everyone to play by the rules.
Editor: Thank you, Dr. Chen, for your insights on this complex issue. It’s clear that the Archegos saga is far more than a legal matter; it’s a time for reflection and change in financial practices.
Dr. Chen: Thank you for the opportunity to discuss this crucial topic. I hope we see positive changes emerge from this difficult lesson.
Editor: And thank you to our audience for tuning in. Stay with us for more insights on current events shaping our world.