Archegos opposes SEC’s market manipulation claims
A couple of months after the Securities and Exchange Commission (SEC) charged Archegos Capital Management, LP and Sung Kook (Bill) Hwang, the owner of family office Archegos, with orchestrating a fraudulent scheme that resulted in billions of dollars in losses, the defendants have sought to dismiss the complaint.
This becomes clear from a set of documents filed with the New York Southern District Court on June 28, 2022.
The SEC asserts claims against Archegos Capital Management, LP (ACM) for violations of Sections 17(a) of the Securities Act of 1933, and Sections 9(a)(2), 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934. The Complaint offers two theories of liability – first, that ACM manipulated the market prices of certain securities, causing their value to appreciate during a seven-month Relevant Period spanning from September 2020 to March 2021, and second, that certain Archegos employees violated the federal securities laws by making misrepresentations about Archegos’ portfolio to its bank counterparties in an attempt to secure better credit terms – margin rates and additional trading capacity.
According to Archegos, neither of these theories state a claim for relief, and all claims against ACM should be dismissed with prejudice.
The SEC’s market manipulation theory fails on multiple levels, the defendants say, noting that the SEC alleges Archegos engaged in manipulation not by its own market trading, but rather based on the market activity of Archegos’ counterparties, who allegedly engaged in some form of hedge-related trading in response to its private transactions with Archegos.
More specifically, the SEC alleges that Archegos mostly entered into total return swap transactions with counterparties, and when the counterparties entered the market to hedge those transactions by purchasing the underlying securities referenced in the swap, the counterparties’ trading caused an increase in the price of those securities, resulting in a manipulation by Archegos. Total return swaps are private contracts between Archegos and a counterparty bank in which the two parties agree to exchange cash flows based on the value of a reference security.
What the SEC does not allege is that Archegos’ counterparties purchased a share of equity stock for each notional share of a swap entered into with Archegos. This failure dooms their claim, Archegos says, because the SEC has not alleged a required element of manipulation claims: what effect Archegos’ swaps trades had – indirect as they may be – on the market price of the securities at issue.
Moreover, Archegos says, the Complaint does not allege that Archegos had actual knowledge or control over the counterparties’ hedges or that there was any agreement with the counterparties regarding their hedging activity. Archegos says it cannot be held responsible for allegedly manipulating securities that it has not purchased (or sold), or for purchases (or sales) over which it has no knowledge or control. The hedging activity that underlies the SEC’s manipulation theory was within the full discretion and control of the counterparties, not Archegos.
The SEC’s manipulation claim is also not premised on any allegation that Archegos engaged in deceptive conduct accompanying the securities transactions at issue or injected false information into the markets. Although the SEC makes the conclusory allegation that Archegos engaged in “multiple deceptive tactics,” what it alleges in support are perfectly lawful investment activities – that Archegos purchased equity shares and swaps in excessive amounts, in high volumes, in the premarket, during the course of the trading day, and in the last 30 minutes of trading before market close, and accumulated “massive” positions – mostly via swaps – in its top 10 holdings using multiple counterparties.
Archegos argues that the SEC’s allegations do not distinguish Archegos’ transactions from the transactions of an enthusiastic investor with the means to pursue an investment opportunity. Although the Complaint characterizes Archegos’ transactions as “non-economic” (without defining what that means), there are no facts alleged in the Complaint that support the claim that any of Archegos’ transactions lacked an investment purpose or lacked economic substance.
At all times, Archegos retained the risk of loss on its investments, a loss Archegos experienced many times over when its top holdings collapsed the week of March 22, 2021. The SEC’s allegations fail to plead the required deceptive conduct with particularity and to plead a strong inference of scienter, the defendants say.
Further, Archegos says that the SEC’s misrepresentation claims should also be dismissed because the SEC lacks jurisdiction to pursue them. None of the alleged misrepresentations were made in connection with the purchase or sale of securities. Instead, as alleged, they relate to the characteristics of Archegos’ portfolio, and were allegedly made in connection with efforts by the credit departments of Archegos’ counterparties to evaluate the creditworthiness of Archegos, i.e., whether to extend Archegos additional trading capacity or change Archegos’ margin rates.
Archegos concludes that the Court should enter an order dismissing all of the SEC’s claims with prejudice.