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CRO Takes a Plea in Archegos Case

Scott Becker and head trader William Tomita are cooperating in criminal and regulatory-agency investigations

Friday, May 20, 2022

By Jeffrey Kutler

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The chief risk officer and head trader of Archegos Capital Management have entered guilty pleas and agreed to cooperate in the federal prosecution of the family office’s owner Bill Hwang and chief financial officer Patrick Halligan, who were released on bond of $100 million and $1 million, respectively, when the indictments were unsealed in April.

It is a rare instance of a criminal investigation ensnaring the top executives of a financial firm, also including its former CRO, Scott Becker. He and head trader William Tomita were named in parallel Commodity Futures Trading Commission and Securities and Exchange Commission findings. Becker’s cooperation and subsequent settlement of some SEC claims suggested a pattern similar to SEC and CFTC settlements last year with the CRO of LJM Partners, while the Chicago firm’s founder and chief portfolio manager disputed fraud allegations related to $1 billion of “volmageddon” trading losses in 2018.

The Archegos fraud had systemic implications, with major losses reported by institutions such as Credit Suisse, Nomura and UBS. Defendants and co-conspirators “lied to banks to obtain billions of dollars that they then used to inflate the stock price of a number of publicly traded companies,” Damian Williams, U.S. Attorney for the Southern District of New York, said in an April 27 statement. “In one year, Hwang allegedly turned a $1.5 billion portfolio and pumped it up into a $35 billion portfolio,” but when “the music stopped” in March 2021, “billions of dollars of capital evaporated nearly overnight.”

U.S. Attorney Damian Williams: “Billions of dollars of capital evaporated.”

Deputy Attorney General Lisa O. Monaco said the legal action “demonstrates the [U.S. Justice Department’s] unwavering commitment to hold accountable individuals who distort and defraud our financial markets, including those who occupy the C-suite. That is especially true for this kind of crime – the kind that leaves a financial crater in its wake.”

Said FBI New York Office Assistant Director-in-Charge Michael J. Driscoll: “We allege the defendants caused harm to U.S. financial markets and ordinary investors alike, causing significant losses to banks, market participants and Archegos employees.” The charges “highlight our commitment to making sure the investment arena remains free from fraudulent activity of all kinds.”

“House of Cards”

Hwang, Halligan, Becker and Tomita were named in the formal SEC complaint. The agency’s chair, Gary Gensler, said Archegos’ fraud and stock-price manipulation using total return swaps “demonstrated how activities by one firm can have far-reaching implications for investors and market participants,” and its failure “underscores the importance of our ongoing work to update the security-based swaps market to enhance the investor protections, integrity, and transparency of this market.”

SEC Enforcement Division Director Gurbir Grewal called Archegos “a $36 billion house of cards [propped up by] a constant cycle of manipulative trading, lying to banks to obtain additional capacity, and then using that capacity to engage in still more manipulative trading.”

The CFTC’s complaint filed in the Southern District of New York was against Archegos Capital Management and CFO Halligan. There were separate, simultaneous orders filing and settling charges against Becker and Tomita, who “have each admitted their roles in the scheme and agreed to cooperate with the CFTC,” the futures regulator said.

“No Tolerance”

“These actions demonstrate the CFTC will continue to work vigilantly to protect the financial integrity of transactions in the swaps markets,” said acting Director of Enforcement Gretchen Lowe. “There is no tolerance for fraud in the derivatives market, including fraud by family offices like Archegos, which are currently not subject to direct CFTC oversight.”

The Justice Department delineated racketeering conspiracy, securities fraud and wire fraud offenses against all four defendants; each faced multiple counts, and maximum 20-year sentences on each count.

Prison terms – on top of fines – were also threatened in an anti-money laundering case against the co-founders of the BitMEX cryptocurrency exchange, with the prosecutors in New York arguing that compliance by other platforms “will be unattainable if their operators believe there are no meaningful repercussions for failing to comply with the law.” After a plea deal, co-founder and ex-CEO Arthur Hayes was sentenced on May 20 to two years of probation, with six months of home detention. 

A securities fraud allegation against Gregoire Tournant, the former chief investment officer named in the Allianz Global Investors multibillion-dollar fraud indictment announced by U.S. Attorney Williams on May 17, carried a 20-year maximum potential prison sentence. There were five-year maximums on each of four other counts.

Lack of Transparency

The Archegos defendants were said to have avoided regulatory oversight and the discipline of marketplace transparency by operating in a private, family office established by Hwang in 2014. Archegos and its swaps deals thus were not readily identifiable as being behind manipulated market prices.

According to Justice, “Hwang and his co-conspirators lied to and misled some of Wall Street’s leading banks about how big Archegos’ investments had become, how much cash Archegos had on hand and the nature of the stocks that Archegos held. As alleged, they told those lies so that the banks would have no idea what Archegos was really up to, how risky the portfolio was, and what would happen if the market turned.”

When the market turned and artificially inflated stock prices crashed, “immense damage to U.S. financial markets and ordinary investors” resulted, Justice asserted. “In a matter of days, the companies at the center of Archegos’ trading scheme lost more than $100 billion in market capitalization, Archegos owed billions of dollars more than it had on hand, and Archegos collapsed. Market participants who purchased the relevant stocks at artificial prices lost the value they believed their investments held, the banks lost billions of dollars, and Archegos employees, many of whom were required to invest 25% or more of their bonuses with Archegos as deferred compensation, lost millions of dollars.”

“Pressure to Add Capacity”

Both the SEC and CFTC described how allegedly false or misleading information was communicated.

For example, according to the SEC complaint, “As a result of the intense pressure to add capacity that came from Hwang and Hwang’s directive not to provide full information to counterparties, Archegos, through Halligan, Tomita, and Becker, intentionally and recklessly gave materially false information to counterparties, or omitted material information, regarding the concentration and liquidity of its portfolio. They gave this false information to enable Archegos to gain additional capacity for their long SBSs [security-based swaps], to gain more favorable margin rates, and during the week of its collapse in March 2021, to attempt to satisfy margin calls.

“In addition, Hwang, directly and indirectly, misled counterparties, and knew or was reckless in not knowing that Halligan, Tomita, and Becker could not have successfully obtained the capacity increases and margin changes without providing false or misleading information to counterparties.”

The SEC cited multiple calls that month by CRO Becker to a counterparty’s (CP1) “credit risk group concerning a request from Archegos for an additional $2 billion in trading capacity. In response to inquiries from CP1, Becker stated, among other things, (1) Archegos’ single largest positions at other counterparties were in different, larger, and more liquid names than the largest positions it held at CP1, and (2) Archegos’ single largest position totaled approximately 35% of Archegos’ capital (the number previously provided from Halligan). Both representations were false. As Becker knew, Archegos’ largest long exposures at other counterparties were in the same names as those it held with CP1, and Archegos’ largest position at the time was substantially higher.”

The CFTC, in its document accepting Becker’s settlement offer and cooperation agreement, outlined “false or misleading statements” related to the firm’s Investment Fund 1 portfolio as well as “in connection with attempting to meet margin calls during the week of March 22, 2021.”

“Becker intentionally and/or recklessly made false statements about Investment Fund 1 in an effort to maintain and/or purchase additional long single name TRS [total return swaps] positions and to obtain or maintain favorable margin rates,” CFTC said.

 




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