The US Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) have brought separate criminal charges of trading fraud against the family office, Archegos Capital Management, for a scheme that reportedly resulted in $10 billion of swap losses for the firm’s counterparties.
The regulators, who filed their complaints separately before the US District Court for the Southern District of New York, announced the filings on Wednesday.
This is coming a few days after the SEC filed charges against 16 defendants for participating in multi-year fraudulent penny stock schemes that generated more than $194 million in illicit proceeds.
Both watchdogs charged Archegos’s Chief Financial Officer, Patrick Halligan; Head Trader, William Tomita; and Chief Risk Officer, Scott Becker, for their roles in the alleged fraudulent scheme.
However, the SEC included Sung Kook (Bill) Hwang, the owner of Archegos, in its own charge. The agency said its investigation is ongoing.
Additionally, the CFTC issued two orders simultaneously filing and settling charges against Tomita and Becker, adding that both ex-employees have admitted their roles in the scheme and agreed to cooperate with the CFTC.
The SEC’s complaint requested that the court grant a permanent injunctive relief, return of allegedly ill-gotten gains, and civil penalties against Archegos and also sought to bar the individual defendants from serving as a public company officer and director.
The CFTC, in addition to the above requests made by the SEC, asked for restitution for the defrauded swap counterparties, permanent registration and trading bans, and permanent injunctions against further violations of the Commodity Exchange Act and CFTC regulations.
The Archegos Allegations
The SEC in its complaint alleged that from at least March 2020 to March 2021, Hwang purchased on margin billions of dollars of total return swaps.
The Commission noted that these security-based swaps allowed investors to take on huge positions in equity securities of companies by posting limited funds up front.
“As alleged, Hwang frequently entered into certain of these swaps without any economic purpose other than to artificially and dramatically drive up the prices of the various companies’ securities, which induced other investors to purchase those securities at inflated prices,” the SEC said in a statement.
As a result of Hwang’s trading, the independent agency noted, Archegos allegedly underwent a period of rapid growth, increasing in value from approximately $1.5 billion with $10 billion in exposure in March 2020 to a value of more than $36 billion with $160 billion in exposure at its peak in March 2021.
Both the SEC and CFTC charged Archegos and the defendants for repeatedly and deliberately misleading swap counterparties of the Archegos Fund about the fund's exposure, concentration and liquidity. The Archegos Fund is a private fund managed by Archegos Capital Management.
They explained that Archegos’ alleged misleading behaviour was aimed at getting increased trading capacity so that the family office could continue buying swaps in its most concentrated positions, thereby driving up the price of those stocks.
However, in March 2021, the price declined in Archegos’s most concentrated positions allegedly triggering significant margin calls that Archegos was unable to meet, and Archegos’ subsequent default and collapse resulted in billions of dollars in credit losses among Archegos’s counterparties.
The CFTC explained: “By March 2021, Archegos Fund’s largest position was approximately 70% of the fund’s net asset value, yet Archegos, at Halligan’s direction, misrepresented during that time that the fund’s largest position was only 35% of its net asset value.”
“The complaint alleges that as a result of the defendants’ and respondents’ misconduct, Archegos Fund’s swap counterparties collectively lost over $10 billion,” the CFTC further said in its statement.
"We allege that Hwang and Archegos propped up a $36 billion house of cards by engaging in a constant cycle of manipulative trading, lying to banks to obtain additional capacity, and then using that capacity to engage in still more manipulative trading," said Gurbir Grewal, the Director of the SEC’s Division of Enforcement.
Grewal added: "But, the house of cards could only be sustained if that cycle of deceptive trading, lies and buying power continued uninterrupted, and once Archegos’s buying power was exhausted and stock prices fell, the entire structure collapsed, allegedly leaving Archegos’s counterparties billions in trading losses.”
SEC, CFTC’s Chairpersons React
In his reaction, the SEC Chair, Gray Gensler, explained that the collapse of Archegos last spring demonstrated how activities by one firm could have far-reaching implications for investors and market participants.
“The failure of Archegos underscores the importance of our ongoing work to update the security-based swaps market to enhance the investor protections, integrity and transparency of this market. Further, I encourage prime brokers and other market participants to remain vigilant to the risks presented by counterparty relationships,” Gensler said.
On his part, the Chairman of the CFTC, Rostin Behnam, noted that: “honesty, integrity, and transparency are fundamental to the proper functioning of our swaps markets.”
“The CFTC will take action against those who provide false or misleading information that undermines our markets,” Behnam added.
Meanwhile, the blockchain company, Ripple, recently claimed a major win against the SEC after presiding Judge Sarah Netburn denied a request by the SEC to reconsider shielding documents under privilege related to a June 2018 speech made by William Hinman, who was then a Director at the SEC.
