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Until a few days ago, Bill Hwang and his lawyers had thought they would be able to persuade federal authorities not to file criminal charges over last year’s implosion of his $10 billion private investment firm, a trading debacle that caused billions of dollars in losses for Wall Street banks.

But those efforts failed as federal agents arrested Mr. Hwang, the owner of Archegos Capital Management, and his former chief financial officer, on Wednesday morning and charged them with orchestrating a stock manipulation scheme that relied on them concealing the enormous risk the firm had taken on — obfuscation made easier by the loose regulations it operated under.

Mr. Hwang and his former top lieutenant, Patrick Halligan, were arrested at their homes and were expected to appear in Manhattan federal court on Wednesday. The arrests were announced by federal prosecutors, who released a 59-page indictment detailing a scheme that rippled through the stock market when it rapidly unraveled a year ago.

“This scheme was historic in scope,” Damian Williams, United States Attorney for the Southern District of New York, said as he described an arrangement to obtain billions of dollars from banks and pump up the prices of Mr. Hwang’s favored stocks.

“The lies fed the inflation, and the inflation fed more lies,” he said. “Round and round it went. But last year, the music stopped.”

Prosecutors said the men were charged with racketeering conspiracy, securities fraud and wire fraud in connection with a scheme to manipulate the prices of stocks in order to boost returns, and in the process hurt other investors. They said the plan, which relied heavily on borrowed money, helped pump up the firm’s portfolio to $35 billion from $1.5 billion in a single year. At one point, Archegos effectively controlled $160 billion in a small basket of stocks that included ViacomCBS and Discovery, prosecutors said.

But Archegos’s footprint in the market was all but invisible to regulators, investors and even to the big Wall Street banks that had financed its massive trades. Archegos was a lightly regulated firm known as a family office that invested Mr. Hwang’s fortune and the money of a small circle of insiders. And it spread its bets across several banks using sophisticated financial instruments called swaps, which allowed Mr. Hwang to bet on the direction of stock prices without actually owning the shares.

The collapse of Archegos shocked Wall Street and led to investigations by federal prosecutors, the Securities and Exchange Commission and other regulators. The S.E.C. filed its own civil complaint on Wednesday against Mr. Hwang, Mr. Halligan and two former traders at Archegos. The Commodity Futures Trading Exchange also filed its own civil complaint over the matter.

Lawrence Lustberg, a lawyer for Mr. Hwang, said the indictment “has absolutely no factual or legal basis” and said his client was “entirely innocent of any wrongdoing.” Mr. Lustberg called the allegations against his client “overblown” and added that Mr. Hwang has had numerous voluntary meetings with federal prosecutors in Manhattan to discuss the matter, including one this week. Mr. Hwang was arrested at his home in Tenafly, N.J.

Mary Mulligan, a lawyer for Mr. Halligan, said her client “is innocent and will be exonerated.”

The Archegos collapse has put a spotlight on large family offices, which can engage in just as much trading as hedge funds but operate with less regulatory oversight because they do not use the money of outside investors like pension funds, foundations and other wealthy individuals.

But Mr. Hwang, who cut his teeth at the pioneering hedge fund Tiger Management, also borrowed heavily to make his bets, compounding the risk of his trades. Archegos used a complex security sold by banks called a total return swap, allowing Mr. Hwang to wager on the movement of stocks without actually buying them.

The swap allowed Archegos to quickly take on much larger positions in companies than it normally would be able to if it were buying shares outright. And because it was the banks that held the big blocks of stocks, Archegos and Mr. Hwang avoided having to disclose its large positions to regulators and other investors.

In its civil complaint, the S.E.C. said the attempts by Mr. Hwang and his firm to mask their buying power posed a risk not only to the banks that extended them credit but also to other investors, who may have bought stocks like ViacomCBS, Discovery and the Chinese education company GSX Techedu at inflated prices.

Mr. Hwang knew that Archegos could affect markets simply through the exercise of its buying power, the complaint said. In June 2020, an Archegos employee asked Mr. Hwang if the rising price of ViacomCBS shares was a “sign of strength.” Mr. Hwang responded: “No. It is a sign of me buying,” followed by a laughing emoji.

Archegos made swaps deals with a number of banks including Credit Suisse, Nomura, Morgan Stanley and UBS, and prosecutors said Mr. Hwang, Mr. Halligan and others at the firm made “materially false and misleading statements” to conceal the extent of its bets.

The risky result: Archegos held enormous positions in a small number of stocks using billions in borrowed money. The effective size of the firm’s stock positions swelled to $160 billion from $10 billion, rivaling some of the biggest hedge funds in the world.

The wagers quickly fell apart in March 2021, when sharp declines in a few stocks in Archegos’s portfolio led the banks to issue margin calls, demanding more money from Archegos to fund its bets. When Mr. Hwang could not pay, the banks sold off millions of shares that were backing the swaps and took control of collateral that Archegos had posted in exchange for its big borrowings.

The investigations into the collapse of Archegos began soon after the firm imploded. The collapse led to billions in losses for a number of banks, but Credit Suisse incurred the most pain. It lost more than $5 billion, and the trading debacle led to a number of top-level management changes at the bank.

Over the past few months, federal authorities have demanded documents from the firm and banks and had meetings and interviews with a number of former employees at Archegos, including Mr. Hwang.

The indictment names two former Archegos employees as part of the scheme, Scott Becker and William Tomita. Both men have pleaded guilty and are cooperating with the federal prosecution, Mr. Williams said.

At a press conference to discuss the charges, Mr. Williams spoke next to a large graphic poster with the headline: “A cycle of lies and market manipulation.”

“They lied about how big Archegos’s investments had become; they lied about how much cash Archegos had in hand; they lied about the nature of the swaps that Archegos held,” Mr. Williams said. “And we allege that they told those lies for a reason: so that the banks would have no idea that Archegos was really up to a big market manipulation scheme.”

The S.E.C. complaint said that Mr. Becker, the former chief risk officer at Archegos, and Mr. Tomita, the firm’s former top trader, typically led discussions with the banks about the firm’s trading positions but that Mr. Hwang and Mr. Halligan directed and set the tone for those discussions.

Authorities said Mr. Becker and Mr. Tomita understood that if they were truthful with the banks about the amount of risk Archegos was taking on, the financial institutions would not keep arranging new derivatives trades for it. Lawyers for Mr. Becker and Mr. Tomita did not respond to requests for comment.

The collapse of Archegos has spurred calls for more disclosure by large family offices to the S.EC. and greater transparency in the derivatives market so regulators can better gauge the kind of risk that traders and banks are taking on.

In a statement, Gary Gensler, the S.E.C. chairman, said the collapse of Archegos “underscores the importance of our ongoing work to update the security-based swaps market to enhance the investor protections.”

This is the second time Mr. Hwang has run into trouble with regulators. In 2012, he reached a civil settlement with U.S. securities regulators in a separate insider trading investigation involving his former hedge fund and was fined $44 million. Mr. Hwang was barred from managing public money for at least five years but was still able to invest his own fortune. Regulators formally lifted the restriction in 2020.

Mr. Hwang, however, largely fell out of sight after the 2012 settlement. Archegos wasn’t particularly well-known, even though it had employed dozens of employees at its peak. Some employees also worked for a large charitable foundation Mr. Hwang established — Grace and Mercy Foundation — that gave to many religious causes.

Erik Gordon, a law and business professor at the University of Michigan, said it was time that large family offices be treated like all other investment advisers and subject to S.E.C. oversight, audits and inspections.

“If Archegos doesn’t lead to bringing large family offices into Investment Advisor Act regulation, nothing will, short of a Martian invasion,” Mr. Gordon said.


April 27, 2022

A previous version of this article misstated Credit Suisse’s loss. It was $5 billion, not $5 million.

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