On June 11, 2020, Bill Hwang received a text message from an investment analyst at his family office, Archegos Capital Management, which had quietly grown into one of Wall Street’s largest stock operations. One of Archegos’ largest positions, ViacomCBS stock, had held up well on a declining market day and the analyst wanted to ask if the improving price was “a sign of strength?”
Hwang didn’t think so.
“No,” Hwang replied in a text message. “It’s a sign that I’m buying.” Hwang followed the statement with an emoji.
Indeed, Hwang’s trading operation bought 82.1 million shares of ViacomCBS on June 11, 2020, representing 17% of the day’s trading volume. Details of the text messages and stock trades were included in a 59-page indictment that federal prosecutors in Manhattan released on Wednesday. The indictment accuses Hwang and Patrick Halligan, chief financial officer of Archegos, of market manipulation and conspiracy to defraud some of the most sophisticated banks in the world.
The indictment and an accompanying regulatory complaint paint the most detailed picture of the shocking explosion of Archegos in March 2021, which defaulted on the commercial margin loans it had obtained from huge banks like Credit Suisse CS,
Nomura Holdings 8604,
and Morgan Stanley MS,
The Archegos collapse has rattled markets and caused billions of dollars in losses for some banks. It also raised questions about the lack of regulation of family offices, like Archegos, which had become a massive market player that few even on Wall Street knew existed. He held huge positions, often through derivatives, in big stocks like Netflix and Amazon that were never disclosed in regulatory filings.
Even today, the reach of Archegos remains breathtaking. According to the indictment, Hwang’s personal fortune grew from $1.5 billion to $35 billion without public knowledge, and the leverage increased the size of Archegos’ positions in the market at $160 billion. “Despite the size of Archegos’ positions, the investing public was unaware that Archegos had come to dominate the trading and shareholding of several companies,” federal prosecutors said.
The indictment details how Hwang worked to manipulate stock trading, such as ViacomCBS, Discovery Communications, Tencent Holding, Baidu BIDU,
and GSX Techedu. But it also paints a picture of a man whose business practices changed drastically around March 2020, when Archegos had just $1.6 billion in invested capital, and Hwang moved away from a strategy buy-and-hold driven by in-depth security analysis in an attempt to corner stocks and prices rise with size and brute force. Securities regulators describe Hwang as “dismissing his research operations, ignoring their stock price targets in favor of his own outsized stock price targets” that relied on little or no analytical support.
In particular from January 2021 to March 2021, according to securities regulators, Hwang timed Archegos trades to maximize impact, engaging in pre-market trades “setting the tone” for the trading day, tricking other traders into buying certain stocks and trading the last 30 minutes of the trading day. With fee-hungry bankers ready to help, federal prosecutors say Hwang and Archegos have been turned “into significant economic forces in US stock markets.” An attorney for Hwang, who lives in Tenafly, NJ, said he denies any wrongdoing.
‘Are we going to be able to pay for these exchanges today? I don’t see how we can
Sung Kook “Bill” Hwang was a Tiger Cub, a term used for hedge funds started by former analysts who worked for Julian Robertson, the legendary hedge fund pioneer and founder of Tiger Management. Robertson supported his proteges as they launched companies like Tiger Global Management, Coatue Management and Viking Global Advisors which are now among the largest hedge funds on the planet and known for their long/short investment strategies which in recent years, often revolved around technology companies.
Hwang was once one of the greatest Tiger Cubs. He started Tiger Asia Management in New York to trade stocks in markets like Hong Kong, Korea and Japan, and has managed up to $8 billion, mostly for clients. But Tiger Asia suffered heavy losses during the 2008 financial crisis, and the fund settled insider trading issues with the U.S. Securities and Exchange Commission in 2012 related to trades Tiger Asia made in Hong Kong.
With the money he had left, Hwang opened his family office, Archegos, in 2013 and began trading tech stocks listed in the United States rather than Asia, in part because he was banned from trade in Hong Kong. Since family offices are not required 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 business behavior in the tax returns of his Christian-oriented foundation. He showed that Hwang made a fortune buy and hold for years the shares of the hottest technology 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 in a church. Like Hwang, Wood has pursued an aggressive investment strategy focused on high-growth tech names. For years, Hwang managed an even more concentrated portfolio, and eventually the big banks were enticed to lend to him again despite his legal background. He used total return swaps to avoid regulatory rules that require public disclosure of broad ownership of individual securities and also began trading in American certificates of deposit of Asian companies traded on American stock exchanges.
The way federal prosecutors describe it, Hwang’s behavior changed dramatically in March 2020, just as markets began to rebound from the initial COVID-19 lockdowns. He significantly pushed his portfolio’s leverage and use of derivatives, and used his increased market power, largely hidden from public view, to support and defend the prices of specific stocks through of manipulative negotiation strategies, according to federal prosecutors. Hwang increased the demand for certain stocks and decreased their supply. The basis of the criminal case brought by federal prosecutors is that Hwang instructed Archegos to mislead the world’s most sophisticated banks to gain more leverage and further push these strategies.
In 2021, Hwang owned up to 50% of the outstanding shares of companies like ViacomCBS PARA,
and GSX GOTU,
without the knowledge of market participants, prosecutors say. He traded large amounts of these stocks daily, creating unusually large upward price swings, making sure to defend stocks like GSX against short sellers betting on the stock falling. At one point, Archegos accounted for 35% of the daily trading volume of Discovery Communications’ WBD stock,
the federal indictment says. Securities regulators say Hwang would raise prices with progressively higher limit orders throughout the trading day, especially in the last 30 minutes of the trading day. Shares of Discovery Communications and ViacomCBS rose 250% between October 2020 and March 2021, far outpacing most tech stocks.
But even Hwang couldn’t “defend” ViacomCBS’ share price in March 2021, when the company decided to issue $2.6 billion worth of stock. The stock offering sparked a violent sell-off in ViacomCBS stock that Hwang was unable to stop despite what federal prosecutors describe as Hwang’s “extraordinary amount of trading,” using $900 million that consumed a much of the money available from Archegos.
“Are we going to be able to pay for these exchanges today? I don’t see how we can,” said Halligan, chief financial officer of Archegos, described in the indictment. Banks started making margin calls and Archegos collapsed when it couldn’t meet them. As the banks unwound the trades, the underlying stocks fell.