The dramatic downfall of Archegos Capital Management, a private equity firm responsible for a massive market manipulation scheme, has reached a decisive conclusion. Founder Bill Hwang has been convicted of fraud by a federal jury in New York. This verdict sheds light on the intricate web of deceit that led to Archegos’ implosion and the significant losses it inflicted on major financial institutions.
Orchestrating a Scheme: Inflating Stocks for Exorbitant Gains
Following an eight-week trial, the jury found Hwang guilty on all but one of 11 counts. These charges alleged a conspiracy orchestrated by Hwang and former Archegos CFO Patrick Halligan to artificially inflate the stock prices of publicly traded companies. ViacomCBS (now Paramount Global) and Discovery (now Warner Bros. Discovery) were among the targeted companies. The scheme aimed to boost Archegos’ returns at the expense of major banks that unknowingly provided billions in capital. Halligan tried separately, was found guilty on all three counts against him.
Hwang, who maintains his innocence, faces sentencing in October and could receive up to 20 years in prison for each guilty charge.
Lies, Leverage, and the Downward Spiral
Archegos’ collapse, considered one of the biggest Wall Street debacles in recent history, revolved around a strategy built on deception. The firm secured capital from investment banks through a series of misrepresentations. These funds were then used to leverage massive positions in targeted stocks, driving their prices upwards. However, this house of cards came crashing down as Archegos’ overexposure to a limited number of stocks became unsustainable. When the firm began to falter, lenders were forced to sell Archegos’ holdings. This triggered a rapid sell-off, causing the artificially inflated stock prices to plummet. The ensuing market volatility resulted in the evaporation of over $100 billion in market value within days.
ViacomCBS: The Catalyst for Collapse
ViacomCBS played a pivotal role in Archegos’ downfall. After a substantial increase in its stock price throughout 2021, the media company announced a $3 billion secondary share offering to capitalize on the favorable market sentiment. This move, however, proved to be the catalyst for Archegos’ undoing. The anticipated influx of new shares triggered a selloff, putting immense pressure on Archegos’ portfolio and exposing its lenders to the firm’s heavily leveraged positions. Banks like Morgan Stanley, Nomura, and Credit Suisse collectively lost an estimated $10 billion. Credit Suisse, in particular, witnessed a staggering $5 billion vanished from its coffers almost overnight, ultimately leading to a significant management overhaul within the bank.
At its peak holding, Archegos possessed more than half of all freely traded ViacomCBS shares, amounting to a $10 billion stake. These shares, along with Discovery’s stock, subsequently experienced a dramatic decline in 2021, with both companies seeing their share prices plummet by roughly 30%.
Holding Wall Street Accountable
The U.S. Attorney’s Office for the Southern District of New York, the prosecuting body in this case, stated the verdict. The statement emphasized the case’s significance in deterring future misconduct within the financial sector. It declared, “This verdict should send a resounding message that this Office will continue to police the financial markets with an eagle eye and swiftly hold accountable those who think they can cheat the system.”
Hwang’s conviction serves as a stark reminder of the consequences of market manipulation and the importance of robust regulatory oversight. The case raises critical questions about risk management practices within investment banks and the potential for future financial crises stemming from excessive leverage and risky investment strategies.
