The Collapse of a Huge Family Office

A family office is not typically at the middle of what the Commission alleges was a $36 billion house of cards. Family offices are by definition funds that manage of family assets. The investment vehicle become more popular in recent years after the governing rules were written (at one time they are based on individual orders from the Commission). Today many are huge investment funds managing large sums of money.

One such fund was Archegos Capital Management, LLC. As a family office it was exempt from registration under the Advisers Act. That exemption from registration did not extend to fraud charges. Yesterday, the Commission, the U.S. Attorney’s Office and the CFTC filed fraud charges which center on the firm. SEC v. Hwang, Civil Action No. 1:22-cv-03402 (S.D.N.Y. Filed April 27, 2022).

The cases is based on the manipulation of ten different stocks held by the Archegos and a series of lies about the financial condition of the fund which permitted it to completely overextend its credit – the firm collapsed. Those named as defendants are: Sung Kook Hwang, the founder and manager of Archegos who was responsible for all investment decisions; Patrick Halligan, the CFO of the firm; William Tomita, the head trader of Archegos; Scott Becker, the chief risk officer of Archegos; and the firm.

Over a period of about one year, beginning in March 2020, at Mr. Hwang’s direction the firm rapidly grew largely through the use of security-based swaps with about a dozen counterparties. Those arrangements put the firm at risk from volatile prices.

To sustain its growth trajectory, the firm chose not to rely on just market prices. Rather, it began manipulating the securities of its top ten securities holdings. This was done through purchases of the issuers’ securities and entry into security-based swaps referencing those issuers. In effect, Archegos dominated the securities of those issuers through trading and by marking the close for those stocks – trading at the end of the day to set the closing price.

A key part of the scheme involved maintaining the margin with Archegos’ counterparties. To achieve this the family office could not share its actual financial results with its counterparties as it pushed and strained the credit arrangements. To continue extending the lending arrangements Defendants Hwang, Halligan, Tomita and Becker misled the counterparties. False information regarding the composition of the firm’s portfolio was furnished as well as about its concentration and liquidity.

Eventually, Defendants could not maintain the fraud. As the security prices began to fall in March 2021 the fraud unraveled and Archegos spiraled to collapse. Billions of dollars in losses resulted. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Sections 9(a)(2) and 10(b). The case is pending. The U.S. Attorney’s Office for the Southern District of New York filed parallel criminal charges. The CFTC also filed a civil action.

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