SEC amends complaint against Archegos, Bill Hwang
About two months after Archegos responded to the SEC’s market manipulation claims, the regulator has filed an amended complaint in this case.
Today, the SEC submitted an amended complaint against Defendants Sung Kook (Bill) Hwang , Patrick Halligan, William Tomita, Scott Becker, and Archegos Capital Management, LP. The complaint was filed with the New York Southern District Court.
The SEC alleges that the defendants engaged in a fraudulent scheme. Two of the defendants have pled guilty to crimes concerning the facts alleged in the Amended Complaint – that included interlocking deceptive acts and misconduct, through false and misleading statements to security- based swap (“SBS”) counterparties and prime brokers and manipulative trading designed to artificially move the market, which, in tandem, allowed Archegos to increase its assets under management from around $4 billion to over $36 billion in just under six months.
One of the defendants, Archegos’s head trader William Tomita, stated that he “agreed with [Hwang] and others to carry out the business of Archegos through a pattern of manipulating the prices of securities and deceiving counterparties.”
Further, the complaint alleged that, from March 2020 until its collapse in March 2021, Archegos, at Hwang’s direction, underwent a period of rapid and exponential growth, achieved largely through the entry into SBSs with about a dozen Counterparties, which subjected Archegos to significant exposure to rising and falling share prices of the issuers referenced in its SBSs. Archegos’s growth thus presented the firm with a predicament.
To continue growing, and otherwise maintain the gains it had achieved through its ramp-up of exposures, Archegos needed to ensure that (1) the value of those exposures would continue to appreciate, and (2) its Counterparties would continue to extend credit margin and trading capacity necessary for Archegos to enter into even more SBSs.
From at least September 2020 through March 2021 (“Relevant Period”), Archegos engaged in a scheme to manipulate the market for the securities of the issuers that represented Archegos’s top 10 holdings (“Top 10 Holdings”), both through trading of the issuers’ securities and entry into SBSs referencing those issuers, which functionally equaled trading the issuers’ securities.
Archegos, through Hwang and Tomita, effected this scheme by dominating the market for its Top 10 Holdings. In addition, as it established dominant market share of the Top 10 Holdings, Archegos used tactics such as “setting the tone” (as Hwang put it) by engaging in large pre-market trading; bidding up prices by entering incrementally higher limit orders throughout the trading day; trading at the close or “marking the close” by engaging in large trading at the end of the trading day; and by other non-economic trading, all with the goal of artificially inflating the share prices of its Top 10 Holdings.
The margin and capacity extended by Archegos’s Counterparties served as the fuel for its manipulative trading. However, Archegos could not rely on its Counterparties to provide it with ever greater margin and capacity unabated, particularly given Archegos’s propensity to stretch its available trading capacity with Counterparties to its limits. Indeed, as of the beginning of the Relevant Period, certain of Archegos’s Counterparties already had begun asking Archegos questions to evaluate its risk profile, which, had Archegos answered them truthfully, would have led Archegos to exhaust the finite trading resource that its Counterparties provided.
To avoid this result – despite varying degrees and quality of risk management and proactive questioning of Archegos by its Counterparties – Archegos, through Hwang, Halligan, Tomita, and Becker, deliberately misled many of Archegos’s Counterparties during the Relevant Period in order to obtain increased trading capacity to further its manipulative trading and ever- increasing ramp-up of exposures.
As part of the scheme, Archegos knowingly provided these Counterparties with false assurances concerning its portfolio composition, its concentrated exposure, and its liquidity profile. As Archegos intended, these deceptions fraudulently convinced its Counterparties that Archegos’s overall positioning was less concentrated and more liquid than it actually was. These deceptions induced Archegos’s Counterparties to continue to transact with it and extend leverage beyond what the Counterparties’ risk tolerance would have otherwise permitted had they known the truth – thus allowing Archegos to continue to grow its positions and, thereby, drive up and sustain the stock prices of the Top 10 Holdings.
In late March 2021, the house of cards collapsed. Price declines in some of Archegos’s Top 10 Holdings triggered significant margin calls that Archegos was unable to meet. In turn, without its trading activity to artificially inflate the prices of the Top 10 Holdings, those stock prices collapsed. And, Archegos’s subsequent default resulted in billions of dollars in credit losses among its Counterparties and significant losses to the market participants who invested in the stocks at inflated prices.
The SEC alleges that:
- Hwang, Tomita, and Archegos violated Section 17(a) of the Securities Act of 1933 (“Securities Act”) [15 U.S.C. § 77q(a)], Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) [15 U.S.C. § 78j(b)] and Rule 10b-5 thereunder [17 C.F.R. § 240.10b-5], and Section 9(a)(2) of the Exchange Act [15 U.S.C. § 78i(a)(2)];
- Defendants Halligan and Becker violated Sections 17(a)(1) and (3) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder;
- Defendant Halligan aided and abetted Defendant Becker’s violations of Sections 17(a)(1) and (3) of the Securities Act and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, in violation of Section 15(b) of the Securities Act [15 U.S.C. § 77o(b)] and Section 20(e) of the Exchange Act [15 U.S.C. § 78t(e)];
- Defendant Hwang, as a control person of Archegos and Tomita under Section 20(a) of the Exchange Act [15 U.S.C. § 78t(a)], is liable for violations by Archegos and Tomita of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.
The SEC seeks a final judgment: (a) permanently enjoining Defendants from violating the federal securities laws and rules this Amended Complaint alleges they have violated; (b) ordering Defendants to disgorge all ill-gotten gains they received as a result of the violations alleged herein and to pay prejudgment interest thereon; (c) ordering Defendants to pay civil money penalties pursuant to Section 20(d) of the Securities Act [15 U.S.C. § 77t(d)] and Section 21(d) of the Exchange Act [15 U.S.C. § 78u(d)]; (d) permanently prohibiting Defendants Hwang, Halligan, Tomita, and Becker from serving as officers or directors of any company that has a class of securities registered under Section 12 of the Exchange Act [15 U.S.C. § 78l] or that is required to file reports under Section 15(d) of the Exchange Act [15 U.S.C. § 78o(d)], pursuant to Section 20(e) of the Securities Act [15 U.S.C. § 77t(e)] and Section 21(d)(2) of the Exchange Act [15 U.S.C. § 78u(d)(2)]; and (e) ordering any other and further relief the Court may deem appropriate or necessary.
Tomita and Becker have consented to the entry of partial judgments imposing certain injunctive relief against them and leaving certain potential additional relief for further resolution.