Mary Mulligan, a lawyer for Mr. Halligan, said her client “is innocent and will be exonerated.”
The Archegos collapse has put a spotlight on large family offices, which can engage in just as much trading as hedge funds but operate with less regulatory oversight because they do not use the money of outside investors like pension funds, foundations and other wealthy individuals.
But Mr. Hwang, who cut his teeth at the pioneering hedge fund Tiger Management, also borrowed heavily to make his bets, compounding the risk of his trades. Archegos used a complex security sold by banks called a total return swap, allowing Mr. Hwang to wager on the movement of stocks without actually buying them.
The swap allowed Archegos to quickly take on much larger positions in companies than it normally would be able to if it were buying shares outright. And because it was the banks that held the big blocks of stocks, Archegos and Mr. Hwang avoided having to disclose its large positions to regulators and other investors.
In its civil complaint, the S.E.C. said the attempts by Mr. Hwang and his firm to mask their buying power posed a risk not only to the banks that extended them credit but also to other investors, who may have bought stocks like ViacomCBS, Discovery and the Chinese education company GSX Techedu at inflated prices.
Mr. Hwang knew that Archegos could affect markets simply through the exercise of its buying power, the complaint said. In June 2020, an Archegos employee asked Mr. Hwang if the rising price of ViacomCBS shares was a “sign of strength.” Mr. Hwang responded: “No. It is a sign of me buying,” followed by a laughing emoji.
Archegos made swaps deals with a number of banks including Credit Suisse, Nomura, Morgan Stanley and UBS, and prosecutors said Mr. Hwang, Mr. Halligan and others at the firm made “materially false and misleading statements” to conceal the extent of its bets.
The risky result: Archegos held enormous positions in a small number of stocks using billions in borrowed money. The effective size of the firm’s stock positions swelled to $160 billion from $10 billion, rivaling some of the biggest hedge funds in the world.
Read More: Federal agents arrest Archegos owner Bill Hwang and a former top lieutenant.