Archegos Capital Management was an obscure hedge fund unknown outside of Wall Street until last year, when the fund lost billions of dollars due to overleveraged positions in Viacom (VIAC), Baidu (BIDU), Discovery (DISCA), Vipshop (VIPS), and others. Then when these positions caused these stocks to run up in value and then crash, Archegos caused about $10 billion in losses.
Losing a lot of money is not good, but it’s not unusual. Around the same time, once obscure hedge fund Melvin Capital also lost a few billion thanks to the well publicized Gamestop (GME) short squeeze, but despite conspiracy theories to the contrary, Melvin actually did nothing illegal. Archegos, however, engaged in “manipulative trading and deceptive conduct,” or so the US government is accusing Hwang in particular of doing.
That illegal activity also meant that Hwang was not the one who bore the brunt of the losses. According to Fortune, Credit Suisse (CS) lost $5.5 billion, Nomura lost $2.3 billion, and Morgan Stanley (MS), UBS, and Mitsubishi Bank lost less than a billion each.
How this happened was surprisingly simple. Hwang borrowed a bunch of money from each bank to buy stocks and contracts on stocks on margin without telling each bank it had borrowed from the others. Hwang also lied about Archegos’s holdings to each of the banks, so that none knew how much he owed to the other banks.
This didn’t happen all at once. He borrowed a little, bought the shares, the shares went up in value, and then he borrowed more to buy more shares. He did this to the point where had massive positions in the companies (over 50% of VIAC, over 60% of DISCA, and over 45% of Tencent (TCEHY), just to name a few. This is a ridiculous amount of ownership; even the largest hedge funds, some of which have $100 billion in assets under management, won’t usually have more than 10% of any company’s shares, even activist hedge funds who use a big position in a company to aggravate for change (Archegos was not an activist hedge fund and did not do this, making these ridiculously massive positions even more absurd).
Of course, the massive size of these positions isn’t itself illegal—and if you think that buying a lot of shares, watching the price go up, and buying more isn’t illegal, you’d be right.
Unfortunately for Hwang, the smoking gun was his market activity, which goes beyond buying a bunch of shares. Archegos would buy significant amounts of shares in the last thirty minutes of the trading day, which results in an increase in the margin Archegos had access to thanks to the way margin calculations are made at investment banks. Then Archegos would buy more shares the next day thanks, effectively, to creating his own borrowing ability by pushing up shares at the end of the day.
Could Archegos have simply chosen to buy in the last thirty minutes without the intention of driving up their borrowing power? Such a move would theoretically be legal, but combined with the fact that Hwang lied about his positions to his various banks and there’s no clear economic incentive for buying in the last thirty minutes of the day beyond inflating his margin buying ability, the answer quite clearly seems to be, no, this was a case of fraud.
It is important to remember that this narrative is based on the facts that the U.S. Justice Department has laid out. If those facts are wrong, or if Hwang can show a different interpretation of those facts that suggests he did not actually lie to his banks and manipulate markets to raise his borrowing power, he will be found not guilty and be released a free man. But as it stands, it is hard to imagine many defenses that would work against an unusually solid case against the man—particularly since the many billions of dollars of losses from Archegos counterparties means the man has few friends on Wall Street left.