CFTC takes action against Archegos Capital Management
The Commodity Futures Trading Commission (CFTC) today launched a lawsuit against Archegos Capital Management, LP and Archegos’s Chief Financial Officer, Patrick Halligan.
According to the CFTC complaint, filed with the New York Southern District Court today and seen by FX News Group, in the span of a year, between March 2020 and March 2021, Archegos and Archegos’s CFO, as well as others acting on their behalf or under their direction, engaged in a scheme whereby they intentionally and/or recklessly provided false or misleading material information and/or omitted to provide such material information to their trading swap counterparties.
During this period, the value of Archegos’s portfolio increased fifteen-fold before it abruptly collapsed, causing its Swap Counterparties to suffer losses totaling billions of dollars.
Archegos’s spectacular rise and catastrophic fall arose from a pattern of deceit in which Defendants and their Accomplices routinely led Archegos’s Swap Counterparties to falsely believe that the portfolio of Archegos Fund, LP, a fund managed by Archegos, was far less risky than it actually was.
Beginning in March 2020, Archegos Fund embarked on a new trading strategy that was materially different from its historical practice. Under the new strategy, Archegos, as investment manager of Archegos Fund, caused Archegos Fund to enter into hundred million-dollar swap trades on a daily basis that focused on a concentrated group of securities. Due to the size of Archegos Fund’s positions, they could not easily be liquidated.
These trades were spread across at least eight different counterparties, and therefore each Swap Counterparty saw only a fraction of Archegos Fund’s total exposure. Swap Counterparties thus engaged in frequent oral and written communications with Archegos’s representatives to try to understand the aggregate composition of Archegos Fund’s holdings and to gauge the risk associated with Archegos Fund’s whole portfolio.
During the course of these communications, Defendants and their Accomplices repeatedly misrepresented material facts or omitted to state material facts relevant to assessing the risk of Archegos Fund’s portfolio, including the size of its largest long positions, aggregate gross exposure, amount of unencumbered cash, and liquidity. Defendants and their Accomplices misrepresented and/or hid material facts in order to conceal the true risk of Archegos Fund’s portfolio so that Archegos Fund could obtain additional capacity to trade even greater volumes of highly leveraged, concentrated, and illiquid long positions, while maintaining favorable margin rates.
The Swap Counterparties tried to mitigate the risk posed by Archegos Fund’s portfolio, including by requiring Archegos Fund to maintain sizable short swap positions. Archegos Fund met these short requirements primarily through swaps based on exchange-traded funds and custom baskets that referenced large and liquid sections of the market. These Broad-Based Security Index Swaps were designed to act as hedges to mitigate the risks imposed by Archegos Fund’s portfolio.
Without truthful information from Archegos, however, Archegos Fund’s Swap Counterparties could not accurately assess the risk posed by Archegos Fund’s aggregate positions and could not accurately calibrate the appropriate level of risk controls. If Archegos Fund’s Swap Counterparties had known the full scope of its long positions, they would have taken risk control measures including, in part, limiting, restricting, or reducing Archegos Fund’s trade capacity, enhancing margin requirements, and maintaining appropriate levels of Broad-Based Security Index Swaps that would better mitigate the risk of Archegos Fund’s overall portfolio.
The lies of Defendants and their Accomplices disguised the fact that Archegos Fund was a house of cards that was one bad week away from ruin. That week was the week of March 22, 2021. Starting on Tuesday, March 23, and continuing through the rest of the week, virtually all of Archegos Fund’s largest long positions sharply declined, triggering a cascade of margin calls from its Swap Counterparties totaling over $13 billion.
The margin calls far exceeded Archegos Fund’s available cash, causing it to collapse, dismiss employees, and cease operations.
Many of Archegos Fund’s Swap Counterparties suffered the consequences of Archegos Fund’s trading strategy, which was based on repeated lies. This is so because to hedge Archegos Fund’s swap positions, its Swap Counterparties typically took cash positions in the same referenced asset—for example, if Archegos Fund entered into a long swap referencing Stock A, its Swap Counterparty would buy an equivalent notional value of Stock A.
When Archegos Fund failed to pay its margin calls and defaulted on its swaps, counterparties were forced to unwind the swaps and liquidate the hedges by selling the underlying securities (e.g.,Stock A) back into the market at prices well below what they had originally paid. As a result, one of Archegos Fund’s Swap Counterparties lost over $5 billion; another lost almost $3 billion; and in total, Archegos Fund’s Swap Counterparties lost over $10 billion.
The CFTC alleges that the defendants have engaged in practices that violate the provisions of the Commodity Exchange Act and the Commission’s regulations. Archegos is also liable for the actions of its officers, employees, or agents.
Halligan is accused of having aided and abetted Archegos’s violations and is therefore also liable for those violations pursuant to Section 13(a) of the Act, 7 U.S.C. § 13c(b).
Accordingly, the CFTC has brought this action to enjoin the defendants’ unlawful acts and practices and to compel compliance with the Act. In addition, the Commission seeks civil monetary penalties and remedial ancillary relief, including but not limited to trading and registration bans, restitution, disgorgement, and such other relief as this Court may deem necessary or appropriate.
The charges brought by the CFTC add to the charges brought by the SEC against Archegos.