The
United States’ Securities and Exchange Commission (SEC) and the Commodity
Futures Trading Commission (CFTC) have brought separate criminal charges of trading
fraud against 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 before the U.S. 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
fraudulent scheme.
The
SEC, however, included Sung Kook (Bill) Hwang, the owner of Archegos, to
its own charge. The agency said its investigation is ongoing.
The
CFTC also issued two orders simultaneously filing and settling charges against Tomita and
Becker, adding that both ex-employees have each admitted their roles in the
scheme and agreed to cooperate with the CFTC.
The
SEC’s complaint prayed 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,” 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
SEC and CFTC also 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,
They
explained that Archegos’s alleged misleading was to get 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, price declines in Archegos’s most concentrated positions
allegedly triggered 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.
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,” 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 S. Grewal, 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, Chair of 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, 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.
The
United States’ Securities and Exchange Commission (SEC) and the Commodity
Futures Trading Commission (CFTC) have brought separate criminal charges of trading
fraud against 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 before the U.S. 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
fraudulent scheme.
The
SEC, however, included Sung Kook (Bill) Hwang, the owner of Archegos, to
its own charge. The agency said its investigation is ongoing.
The
CFTC also issued two orders simultaneously filing and settling charges against Tomita and
Becker, adding that both ex-employees have each admitted their roles in the
scheme and agreed to cooperate with the CFTC.
The
SEC’s complaint prayed 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,” 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
SEC and CFTC also 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,
They
explained that Archegos’s alleged misleading was to get 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, price declines in Archegos’s most concentrated positions
allegedly triggered 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.
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,” 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 S. Grewal, 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, Chair of 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, 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.
Source: https://www.financemagnates.com/institutional-forex/us-regulators-charge-archegos-for-fraud-10-billion-swap-loss/