Bill Hwang — the Julian Robertson protégé who in 2013 was forced to close his Tiger Asia hedge fund to settle insider trading charges — is facing new criminal charges.
On Wednesday, Manhattan federal prosecutors charged Hwang with market manipulation, racketeering conspiracy, and fraud through Archegos Capital Management, Hwang’s family office that collapsed in March 2021 as his stock trading scheme unraveled amid margin calls by his prime brokers.
Hwang and Archegos CFO Patrick Halligan were arrested Wednesday and charged with using the family office as “an instrument of market manipulation and fraud, with far reaching consequences for other participants in the United States securities markets, companies whose stock prices they manipulated, innocent employees of Archegos whose savings they gambled, and the financial institutions left holding billions of dollars in losses,” according to a criminal indictment in the Southern District of New York. Lawyers for the two men said they were innocent.
U.S. Attorney Damian Williams accused the two men of “lies” that inflated the prices of stocks. “But last year the music stopped,” he said. “The bubble burst. The prices dropped. And when they did, billions of dollars of capital evaporated nearly overnight.”
Hwang and Halligan — along with William Tomita, head trader at Archegos, and Scott Becker, the family office’s chief risk officer — also face Securities and Exchange Commission civil charges. Tomito and Becker have pled guilty and are cooperating with the government.
The implosion of Archegos last March has been well documented, but the indictment reveals some stunning new details. At the time of its collapse, the size of Hwang’s fortune was estimated anywhere between $10 billion and $30 billion. According to the indictment, however, between March 2020 and March 2021, Hwang’s fortune had grown from $1.5 billion to $35 billion. And by employing leverage as high as 1000 percent through total return swaps, it controlled over $160 billion in securities.
When Archegos could not meet margin calls, “more than $100 billion in apparent market value for nearly a dozen companies disappeared within days,” according to the indictment.
It alleges that Archegos manipulated the stocks of 11 companies, including some that were not previously known. Short sellers had long protested about what they saw as market manipulation in one of the names, GSX Techedu, a Chinese education company. But the list also includes ViacomCBS, Discovery Communications, IQIYI, Tencent Music Group, Vipshop Holdings, Baidu, Farfetch, Texas Capital Bancshares, Futu Holdings, and Rocket Companies.
Archegos had economic exposure to more than 50 percent of the float in several of these companies, with a stunning 70 percent of the shares of GSX, according to the SEC’s complaint. A number of short sellers had alleged that GSX was a fraud before Hwang started amassing his stake by using total return swaps.
Because those swaps don’t have to be disclosed to the public, his position was unknown, and the largest holders of record were his swap counterparties — the prime brokers who bought the stock to cover their exposure to Hwang’s swaps bets. Archegos allegedly misled the banks about its positions, which were spread around the Street. When the stocks collapsed, the banks lost billions of dollars.
The GSX situation is particularly noteworthy, as some short sellers and whistleblowers had alerted the SEC to what they viewed as potential market manipulation due to suspicious trading patterns in the stock shortly after Archegos began buying. The first known letter to the SEC alleging such market manipulation was sent in July of 2020 by Joseph White, who on Twitter calls himself a “whistleblower exposing financial corruption in markets.”
One short seller who also wrote several letters to the SEC said that he believed Hwang “picked Chinese companies that don’t have adequate disclosure and aren’t highly known by Wall Street,” including stocks with high short interest.
By the end of July 2020, Hwang had more than $1 billion in exposure to GSX, according to the indictment. At that time the stock neared $100 per share, after falling below $30 per share on a short report by Muddy Waters in May. GSX went on to trade as high as $141 per share in August, and additional purchases by Hwang continued to prop it up. The stock — which changed its name to Gaotu after the Archegos implosion — now trades below $2.
According to the indictment, “Hwang would buy heavily to ‘defend’ the price of securities facing negative press or market movements. This happened frequently, but not exclusively, with respect to GSX, which was especially volatile due in part to active short sellers, regulatory inquiries, and public accusations of fraud.”
As the portfolio became more concentrated, the indictment alleges that “Hwang traded with the further purpose of propping up the stock price to avoid margin calls — which, due to the extraordinary concentration of Archegos’s portfolio, might trigger the collapse of its positions.”
The indictment lays out how Hwang traded, sometimes before the market opened or after it closed or to counteract bad news, and maximized his leverage with a trading strategy he called “bullets.”
It also alleges that Hwang worked with others to “maximize trading capacity and market impact, ” saying that Hwang “coordinated certain trades with a close friend and former colleague … who founded a certain hedge fund … and controlled [the fund] during the relevant time period.”
As the indictment explained, when Hwang’s prime brokers said they could no longer hold swaps positions on GSX “sometime” in 2021, Hwang was aware that the hedge fund also had a GSX swaps position at the same prime broker. To free up the prime broker’s capital for Hwang’s trading, he “caused” the hedge fund to move its position to another prime broker, according to the indictment.
The hedge fund, while not named, is Teng Yue Partners, whose founder Tao Li is a Hwang protégé who was heavily invested in GSX via total return swaps. Teng Yue lost 34 percent last year and was down 6.5 percent this year through February, according to an individual familiar with the fund. Li did not respond to a request for comment.
The “coordinated trades” allowed Hwang to make additional purchases in GSX without going to another prime broker, the indictment said. Between December 2020 and March 2021, it alleged that Archegos averaged more than 15 percent of the trading volume of GSX on a daily basis. During that period, Archegos exceeded 30 percent of daily volume on approximately 11 days, and exceeded 35 percent on approximately five days.
By February of 2021, Archegos had more than $10 billion in economic exposure to GSX, according to the indictment. When its prime brokers at Morgan Stanley asked it to transfer some of the position to another counterparty because GSX was so illiquid, Archegos could not do so, the indictment alleged.
As Institutional Investor previously reported, one of the most well-known GSX short sellers, Muddy Waters founder Carson Block, said that in the summer of 2020 he had learned from two insiders in the U.S.-China investment world that some Tiger Cubs — including Hwang and Li — were behind the runup in the shares, which he called an orchestrated short squeeze in a company that “everyone knows is a fraud.” But the only Tiger Cub that bought shares outright was Chase Coleman’s Tiger Global Management, which was also one of GSX’s top shareholders. Tiger sold out by the end of the first quarter, when the Archegos implosion occurred.
Since the Archegos implosion, the SEC has proposed new rules regarding disclosure of swaps positions.