DOJ seeks to intervene in CFTC action against Archegos
The Department of Justice (DOJ) is seeking to intervene in the case brought by the Commodity Futures Trading Commission (CFTC) against Archegos Capital Management.
On November 3, 2022, Damian Williams, the United States Attorney for the Southern District of New York submitted an application (i) to intervene in the CFTC case, pursuant to Rule 24 of the Federal Rules of Civil Procedure; and (ii) to stay discovery in the CFTC case until the conclusion of the parallel criminal case.
The DOJ argues that the Court should stay discovery in the CFTC case until the conclusion of the trial in the criminal case. The CFTC Case arises from and concerns much of the same conduct and circumstances that underlie the Criminal Case and litigation of the CFTC Case will necessarily involve substantially the same facts, documents, and witnesses relevant to the criminal trial.
A stay of discovery is appropriate, the DOJ says, because any exchange of discovery in the CFTC Case would be asymmetrical and would allow the defendants to circumvent the criminal discovery rules and improperly tailor their defenses in the Criminal Case, which has been scheduled for trial.
And a stay of discovery now would be fair because it would permit the defendants to litigate putatively dispositive motions to dismiss in the CFTC Case, while conserving the parties’ resources and preventing improper abuse of civil discovery tools to gain advantage in the Criminal Case.
The CFTC does not oppose the Government’s request for a stay of discovery.
On April 27, 2022, the United States District Court unsealed an indictment charging Halligan and Sung Kook (Bill) Hwang in a total of eleven counts. Halligan and Hwang each were charged with one count of racketeering conspiracy, securities fraud, and wire fraud, respectively; Hwang was also charged with an additional count of securities fraud and seven counts of market manipulation. See generally Indictment.
Also on April 27, 2022, the Securities and Exchange Commission (SEC) filed a complaint against Hwang, Halligan, and Archegos Capital Management LP alleging violations of securities laws related to the same schemes as contained in the Indictment.
On the same day, the CFTC filed a complaint against Halligan and Archegos Capital Management LP alleging violations of the commodities laws relating to the same schemes described in the Indictment.
On August 26, 2022, the SEC amended its initial complaint to add further detail, including quotations from the transcript of criminal proceedings involving one of the Government’s cooperating witnesses.
As alleged in the Indictment, the Amended SEC Complaint, and the CFTC Complaint, Halligan, with Hwang and others, participated in corrupting the operations and activities of the family office known as Archegos Capital Management and its related corporate entities and employees.
Halligan, Hwang, and their co-conspirators used Archegos, a family office that invested Hwang’s personal fortune, as an instrument of market manipulation and fraud. Hwang, the founder and co-Chief Executive Officer of Archegos Capital Management (ACM), and Halligan, ACM’s Chief Financial Officer, along with their co- conspirators, used Archegos to perpetrate two interrelated criminal schemes.
First, Hwang schemed and conspired to defraud market participants by manipulating, controlling, and artificially affecting the market for certain securities in Archegos’s portfolio. In particular, to drive up the prices of those securities, Hwang amassed extraordinary exposure to those stocks through billions of dollars in purchases made with money borrowed from numerous leading global investment banks and brokerages based on lies and misrepresentations.
The increased demand for these stocks, and the dwindling supply of freely trading shares, led to significant artificial appreciation in the price of each stock. This manipulative strategy harnessed the margin frameworks of Archegos’s Counterparties by recycling “excess” margin into further buying. In turn, the strategy generated additional price inflation and, thus, still more “excess” margin.
Hwang further used his market power to “support” or “defend” the prices of stocks underlying Archegos’s positions through a variety of manipulative short-term trading techniques, including by engaging in trades at certain times, or trading in certain dollar amounts or volumes of shares, in ways designed and intended to artificially affect stock prices. In doing so, Hwang led market participants to believe that the prices of those stocks were the product of natural forces of supply and demand when, in truth, they were the artificial product of Hwang’s manipulative trading and deceptive conduct that caused others to trade.
Second, with Hwang’s knowledge and approval, and as also alleged in this case, Halligan and others repeatedly made materially false and misleading statements about Archegos’s portfolio of securities to the Counterparties.
Specifically, the conspirators repeatedly made materially false and misleading statements to Counterparties about Archegos’s portfolio and positions in order for Hwang to obtain billions of dollars of credit and trading capacity. These lies and misrepresentations disguised the true—and grave—risks associated with Archegos’s portfolio and were integral to the conspiracy’s success.
The false and misleading statements were designed to fraudulently induce the Counterparties into trading with and extending credit to Archegos, enabling and facilitating the market manipulation scheme, and to hide the true risk of doing business with Archegos.
The criminal conduct of the defendants and others transformed Hwang and Archegos into significant economic forces in the United States securities markets. Between in or about March 2020 and the week of March 22, 2021, Archegos’s capital—essentially Hwang’s personal fortune—increased from approximately $1.5 billion to more than $35 billion. Archegos’s positions, including indirectly through derivative securities positions, were larger than any of the disclosed shareholders of multiple public companies. The total size of Archegos’s market positions, including investments made with money borrowed from the Counterparties, grew from approximately $10 billion to more than $160 billion.
These manipulative and fraudulent schemes left Archegos’s portfolio highly vulnerable to price fluctuations in a handful of stocks. In late March 2021, that risk materialized: a decline in the prices of certain stocks in Archegos’s portfolio prompted margin calls; that is, Counterparties required Archegos to provide more cash to support its trading.
Because selling Archegos’s positions to raise cash could further deflate the artificial prices of those securities, leading to a downward spiral, Hwang instead directed Archegos’s traders to engage in a desperate buying spree in an attempt to reverse the price declines of stocks underlying Archegos’s core positions. Acting at Hwang’s direction, the traders used Archegos’s remaining cash and credit, including funds borrowed based on misrepresentations and lies to the Counterparties, to pay for billions of dollars in trades over just a few days.
The buying spree failed, and Archegos was unable to pay the additional cash demanded by its Counterparties. As a result, the Counterparties sold Archegos’s positions, and the prices— which had been artificially supported by the trading directed by Hwang—collapsed. More than $100 billion in apparent market value for nearly a dozen companies disappeared within days.
Ultimately, the market manipulation and fraud schemes, and the billions of dollars in losses that they caused, victimized an array of market participants, including (a) banks and prime brokers that engaged in loans and securities trading with Archegos based on lies and deceit; (b) ordinary investors who purchased and sold the relevant securities at artificial prices; and (c) securities issuers who made business decisions based on the artificial prices of their stocks.
The schemes also caused millions of dollars of losses to innocent Archegos employees who had been required to allocate to Archegos a substantial amount of their pay as deferred compensation.
The Government argues that its requests to intervene and for a stay of discovery in the CFTC Case should be granted. Were discovery in the CFTC Case to proceed, there would be a risk of significant interference with the Criminal Case. A stay of discovery in the CFTC Case would prevent the circumvention of important statutory limitations on criminal discovery and avoid asymmetrical discovery, and preserve the Court’s resources because many of the issues presented by the civil action will be resolved in the Criminal Case. And particularly because such a stay would be limited to delaying the production of discovery, it would not prejudice any party to the CFTC Case.