In Manhattan federal court, Sung Kook Hwang was indicted as the founder of Archegos Capital Management and Patrick Halligan, his former chief financial officer. They were both expected to appear in court later in the day. Both are facing racketeering conspiracy charges and fraud charges.

Hwang allegedly committed fraud between March 2020 and March 2021. He first invested his personal fortune which grew to $1.5 billion to more than $35 billion. Then he borrowed money from major banks and brokerages to invest which grew to about $10 billion and then to $160 billion respectively, according to the indictment.

It was alleged that he concealed the extent of his market prowess to investors using derivative securities, which had no public disclosure requirement.

The indictment stated that Archegos was able to “assist the trading and stock ownership of multiple businesses despite their large positions.”

These risky moves made the portfolio of the firm highly susceptible to price fluctuations in just a few stocks. This led to a torrent of margin calls in March 2021, which had a devastating domino effect. According to the indictment, nearly a dozen companies lost over $100 billion in market value in a matter of days, while banks and prime brokers who were manipulated by Archegos lost billions.

Employees suffer losses in the millions

The scheme also resulted in millions of dollars of losses for innocent Archegos employees, who were required to pay the firm a significant amount of their wages as deferred damages.

The Securities and Exchange Commission brought separate civil charges against Hwang and Halligan.

Gary Gensler, SEC Chair, stated in a release that the collapse of Archegos last Spring demonstrated how one firm’s activities can have far-reaching consequences for investors and market participants.

“We allege Hwang and Archegos supported a $36B house of cards through a continuous cycle of manipulative trade, lying to banks to get additional capacity, then using that capacity for even more manipulative trading,” stated Gurbir S. Grewal director of the SEC Division of Enforcement.

Grewal stated that the house of cards can only be sustained if the cycle of deceptive trade, lies, and buying power continues uninterrupted. Once Archegos’s buying power ran out and stock prices dropped, the whole structure crashed, allegedly costing Archegos and his counterparts billions of dollars in trading losses.”

Lawrence Lustberg, Hwang’s lawyer, stated that lawyers were “extremely disappointed” with a prosecution they believe has no legal or factual basis.

He stated in writing that a prosecution for open-market transactions of this nature was unprecedented and a threat to all investors. As you will see, Bill Hwang is completely innocent of any wrongdoing. There is no evidence that he has committed any crime, and there are many overblown allegations in this indictment.

Lustberg expressed disappointment that Hwang was not notified and was taken into custody despite having “made himself available” and “fully cooperated with the Government’s investigation.”

He wrote that “We vehemently disagree with the charges as a matter law and fact” and that he was confident that he would prevail in Court. However, he stated that an arrest in this case was not necessary, despite an ongoing investigation that has lasted more than a decade and appears to be continuing.

Mary Mulligan, attorney representing Halligan, stated that Pat Halligan was innocent and would be exonerated.