Bill Hwang lost $35 billion in a spectacular trading implosion. Now, prosecutors will try to prove it was a crime.

By Lukas I. Alpert

The hedge fund trader stands accused of misleading banks and manipulating prices through huge, shadowy stock buys, but he argues he did nothing illegal

When it all came apart for Bill Hwang, his $35 billion family office went bust, the stock prices for several major media and technology firms slumped and several big banks were out billions of dollars.

It was all the result of a hyper-aggressive trading strategy Hwang had come up with that wound up stock prices through heavily-leveraged swaps in an effort to corner the market. Eventually the approach proved unsustainable and it all collapsed in March 2021.

Federal prosecutors say it was a crime in which Hwang misled lenders to manipulate prices in order to make himself extraordinarily rich. Legal experts have said it's a case that may end up being difficult to prove as it isn't entirely clear that what Hwang did was illegal.

The trial begins on Wednesday with jury selection in Manhattan's federal court. Hwang, 60, has pleaded not guilty to charges of racketeering, conspiracy and fraud.

"This prosecution is the most aggressive open market manipulation case ever pursued," Hwang's own defense team has argued in court documents. They argue the case is full of "gaping holes" and based on an "incomprehensible manipulation theory."

Federal prosecutors didn't reply to a request seeking comment.

Up from the ashes

Hwang's improbable rise to quietly become one of the biggest market movers in the U.S. came after he was drummed out of the money-management business. An earlier hedge fund Hwang ran in New York, Tiger Asia, that focused on Hong Kong stocks, was convicted of insider trading by U.S. prosecutors in 2012 and he paid $44 million in fines.

With what money he had left, Hwang opened a family office in 2013 that he named Archegos Capital Management. Employing around 50 people and operating out of New York, his initial strategy was slow and steady, trading in well-known tech stocks like Netflix (NFLX), Amazon.com (AMZN) and LinkedIn .

A devout Christian who lived in New Jersey and was born in Korea, Hwang has said that he invests "according to the Word of God and by the power of the Holy Spirit."

"In a way, it's a fearless way to invest. I'm not afraid of death or money. The people on Wall Street wonder about the freedom that I have, actually" he added in remarks he made to a Christian university in Korea in 2018.

The word Archegos, which in Greek means leader, was another way of referring to Jesus Christ in the bible.

In 2020, he embraced a far more aggressive strategy. Using leverage and total return swaps, Hwang quietly built up enormous positions in companies like ViacomCBS (PARA), Discovery Communications , Tencent Holding (HK:700), Baidu (BIDU) and GSX Techedu.

Operating as a family office, which has far fewer disclosure requirements, Archegos never had to register with the U.S. Securities & Exchange Commission. Hwang also maneuvered regulatory rules in a way that allowed him to avoid disclosing his stock positions publicly, even though he at times owned as much as 50% of some companies' outstanding stock.

Despite his earlier involvement in an insider trading conviction, banks couldn't help themselves in their search for fees and decided to lend to Hwang once again as his investment operation grew.

In just over a year, Hwang's personal fortune ballooned from around $1.5 billion to $35 billion, with Archegos' market positions growing from about $10 billion to as much as $160 billion - all of it done in the shadows, federal prosecutors said.

"Despite the size of Archegos's positions, the investing public did not know that Archegos had come to dominate the trading and stock ownership of multiple companies," federal prosecutors said in their indictment which was unsealed in 2022.

Prosecutors say the strategy was designed solely to drive-up prices regardless of a company's performance.

At one point, about eight months before Hwang's investing empire came crashing down, he received a text message from an investment analyst at Archegos asking him if the solid performance of ViacomCBS stock on an otherwise down day for the market was "a sign of strength?"

"No," prosecutors say Hwang responded in a text message. "It is a sign of me buying."

The downward spiral

Hwang's model proved unsustainable after a decline in the price of certain stocks in Archegos' portfolio tumbled in March 2021. That triggered a margin call from some of Hwang's lenders.

Prosecutors said Hwang knew that if he began selling shares to pay back his lenders, it would trigger a much steeper decline in the prices of the underlying stocks, given the outsize positions he held, and lead to a "downward spiral."

So they say Hwang directed his traders to buy more stock to drive prices up.

"Acting at Hwang's direction, the traders used Archegos's remaining cash and credit, including funds borrowed based on lies and misrepresentations to the counterparties, to pay for billions of dollars in trades over just a few days," prosecutors said.

The gambit failed, however, and over $100 billion in share value in more than a dozen companies Hwang held disappeared within a matter of days, prosecutors said.

The collapse left dozens of banks, including Credit Suisse, Nomura Holdings (JP:8604), Goldman Sachs (GS) and Morgan Stanley (MS) losing billions in bad loans. Credit Suisse alone lost $5.5 billion in the Archegos debacle, which contributed to the bank's collapse last year

A crime or not a crime

Prosecutors have conceded that none of the methods Hwang used to make his trades were, in and of themselves, illegal.

But they argue that the intent was to manipulate markets, which makes it a crime regardless of how it was achieved.

They also argue that Hwang lied to the banks Archegos was borrowing from and used the swaps to conceal the enormous positions they were building to evade government regulations.

-Lukas I. Alpert

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05-08-24 1615ET

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