Hedge fund operators go on trial after multibillion-dollar Archegos collapse

NEW YORK (AP) — A fraud trial began Monday for the founder of a hedge fund that cost leading global investment banks and brokerages billions of dollars when it collapsed.

A prosecutor portrayed Bill Hwang, the founder of Archegos Capital Management, as a greedy man hoping to become a Wall Street legend while his lawyer said he was an honest investor fearless about losing money in stocks he believed in. Hwang is on trial along with his former CFO Patrick Halligan.

Hwang and his co-conspirators artificially inflated nearly a dozen stocks before a meltdown three years ago wiped out the company he created and caused the collapse of over $100 billion in market value, prosecutors said.

Prosecutors have accused Hwang of lying to banks to get billions of dollars that his New York-based private investment firm then used to inflate the stock price of publicly traded companies and grow its portfolio from $10 billion to $160 billion.

Their scheme involved secret trading in stock derivatives that enabled their private investment fund to secretly build large positions in companies before it was unmasked as “a house of cards, built on manipulation and lies,” Assistant U.S. Attorney Alexandra Rothman told jurors in an opening statement.

“These two men made fraud their business,” Rothman said. “All because the defendant, Bill Hwang, wanted to be a legend on Wall Street.”

She said Hwang already was a billionaire when he employed his illegal methods in March 2020 as the pandemic hit, working from his Manhattan apartment to sell off many of Archegos’s previous market positions after COVID-19-related losses and begin building extraordinarily large positions in just a few securities.

“He had it all, but it wasn’t enough,” Rothman said.

She said he developed a trading pattern that involved “rigging the game to keep winning on Wall Street.”

Rothman added: “It worked. In less than a year, he grew his business by tens of billions.”

Hwang’s attorney, Barry Berke, countered in his opening that Hwang is not guilty, and he’ll prove the prosecutor’s “theory is wrong.”

“It doesn’t make any sense and you will find that,” Berke said. “He didn’t live the life of a billionaire.”

Berke said Hwang “made no misrepresentations to any banks at all” as he took a lot of risk, investing in companies solely because he believed in them.

He predicted that there would be “overwhelming” proof that Hwang was not guilty, particularly as he made risky trades and often stuck with his choices, trading “like he was willing to lose everything.”

The indictment said that Hwang led market participants to believe the prices of stocks in the fund’s portfolio were the product of natural forces of supply and demand, when in reality, they resulted from manipulative trading and deceptive conduct that caused others to trade.

Hwang and Halligan pleaded not guilty, while the head trader for Archegos and its chief risk officer have pleaded guilty and are cooperating with prosecutors.

Attorney Mary Mulligan told the jury in an opening that Hwang was “an eccentric genius” while her client, Halligan, was “an accountant who lives with his family on Long Island and takes the train to Manhattan.”

“He is a bean counter, not a risk taker,” she said. “They were worlds apart.”

Mulligan said the financial institutions competed with each other to be part of Hwang’s business even though they knew his risky trading history meant a roller coaster-like experience. She noted that Archegos lost nearly 50% of its value in 2018 alone.

“It was all about the money,” she said. “People are blinded by money.”

According to the indictment, Hwang first invested his personal fortune, which grew from $1.5 billion to over $35 billion, and later borrowed funds from major banks and brokerages, vastly expanding the scheme.

The indictment said the investment public did not know Archegos had come to dominate the trading and stock ownership of multiple companies because it used derivative securities that had no public disclosure requirement to build its positions.

At one point, Hwang and his firm secretly controlled over 50 percent of the shares of ViacomCBS, prosecutors said.

But the risky maneuvers made the firm’s portfolio highly vulnerable to price fluctuations in a handful of stocks, leading to margin calls in late March 2021 that wiped out more than $100 billion in market value in days, the indictment said.

Nearly a dozen companies as well as banks and prime brokers duped by Archegos lost billions as a result, the indictment said.

Hwang, of Tenafly, New Jersey, has been free on $100 million bail while Halligan, of Syosset, was free on $1 million bail.