(Bloomberg) — Bill Hwang, the enigmatic investor behind one of the most spectacular trading debacles in Wall Street history, was arrested Wednesday morning over what federal prosecutors characterized as a vast, criminal scheme to mislead banks and manipulate markets.

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A year after the collapse of Hwang’s private investment firm, Archegos Capital Management, sent shock waves through global finance, prosecutors provided their first full account of what happened inside the firm – and new details about the scale of Hwang’s trading and the origins of his strategy.

Hwang was charged with fraud, and Patrick Halligan, the chief financial officer of Archegos, was also arrested and charged with fraud. If convicted of all charges, Hwang faces as many as 380 years in prison. Both men pleaded not guilty in a lower Manhattan courtroom Wednesday and were released on bail.

The collapse of Archegos – Hwang’s family office that was virtually unknown even on Wall Street – exposed gaping holes in how major banks manage their risks, as well as in how regulators oversee Wall Street. A year on, Credit Suisse AG, among others, is still coping with the fallout. Hwang’s spectacular gains and losses extended to such well-known stocks as entertainment giant ViacomCBS Inc.

The two men were charged with 11 criminal counts, including racketeering conspiracy, market manipulation, wire fraud and securities fraud, according to an indictment unsealed Wednesday. The U.S. Securities and Exchange Commission and the Commodity Futures Trading Commission filed related civil complaints as well.

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Some of the allegations made by prosecutors have been known since Archegos’s implosion, such as Hwang’s use of swaps to keep the fund’s stock positions below 5% to avoid triggering required disclosures, and his misleading banks about his portfolio composition and the specific stocks he wagered on.

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But authorities Wednesday revealed the extent of the fraud: Hwang allegedly inflated the value of his portfolio from $1.5 billion to more than $35 billion in one year, and brought the total size of Archegos’s market positions — including borrowed money — to a whopping $160 billion at its peak.

“The scale of the trading was stunning,” Damian Williams, the U.S. Attorney for the Southern District of New York, told reporters Wednesday. “This was not business as usual or some sophisticated strategy — it was fraud.”

The documents also reveal a shift in Hwang’s investment process that began after his move to remote work with the Covid-19 pandemic, spending more time communicating with traders than analysts.

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Prosecutors also allege that Hwang coordinated certain trades with a close friend and former colleague at an unnamed hedge fund to maximize his market impact. The fund manager, identified only as “Adviser-1”, is Tao Li, the head of Teng Yue Partners, Bloomberg reported Wednesday. Li, an acolyte of Hwang’s, and Teng Yue haven’t been accused of wrongdoing, and the firm didn’t respond to messages seeking comment.

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“Bill Hwang is entirely innocent of any wrongdoing,” his lawyer Lawrence Lustberg said in a statement. “There is no evidence whatsoever that he committed any kind of crime, let alone the overblown allegations that pervade this indictment.” Lustberg said Hwang had been cooperative with investigations into Archegos.

The CFO’s lawyer, Mary Mulligan, said in a statement, “Pat Halligan is innocent and will be exonerated.”

With his sweptback salt-and-pepper hair and donning a face mask, green turtleneck and tan pants, Hwang appeared in court Wednesday afternoon to enter his not guilty plea. He agreed to pay $5 million in cash and pledged two properties to secure a $100 million bond, while Halligan agreed to $1 million bail. Both men agreed to restrict their travel.

The indictment said Archegos’s positions were inflated with the use of borrowed money and derivative securities that required no public reporting. When the market turned against the positions in March 2021, Hwang directed the fund’s traders to go on a buying spree in an attempt to prop up their price, federal prosecutors charged.

In addition to Hwang and Halligan, the U.S. named William Tomita and Scott Becker, former senior executives at Archegos, as conspirators. They have pleaded guilty and are cooperating with authorities. The men, who were named as defendants in the SEC suit, have also agreed to work with the CFTC and SEC.

Speaking at a white-collar crime conference in New York Wednesday morning, Deputy U.S. Attorney General Lisa Monaco said the case against Hwang, 57, and Halligan, 45, “really typifies and exemplifies the focus we are placing on holding individuals accountable when it comes to corporate crime and when it comes to corporate malfeasance.”

Bank Losses

Archegos imploded after amassing a concentrated portfolio of stocks by using borrowed money. It collapsed after some of the shares tumbled, triggering margin calls from banks, which then dumped Hwang’s holdings. Banks lost more than $10 billion, prompting the departures of several senior executives and probes into the way firms monitor the risks run by their businesses serving hedge funds.

Fortunes diverged among the firms that Archegos dealt with: Credit Suisse, Nomura Holdings Inc. and Morgan Stanley incurred some of the steepest losses. Others, including Goldman Sachs Group Inc., Wells Fargo & Co. and Deutsche Bank AG, escaped relatively unscathed.

Prosecutors said Hwang and Halligan “repeatedly made materially false and misleading statements about Archegos’s portfolio of securities to numerous leading global investment banks and brokerages,” which encouraged them to trade with and extend credit to Archegos, the government said.

Authorities said Hwang was aware that Archegos could move the market.

In June 2020, when an Archegos analyst texted him whether the increase in ViacomCBS’s stock price that day was “a sign of strength,” Hwang responded, “No. It is a sign of me buying,” followed by a “tears of joy” emoji.

In addition to ViacomCBS, which has since been renamed to Paramount Global, the securities allegedly manipulated by Hwang were Discovery Communications Inc., Tencent Music Group, Texas Capital Bancshares Inc. and Rocket Companies Inc.

The criminal conduct allegedly involved concealing and deceiving the true size of the fund’s positions, liquidity and concentration from counterparties, by spreading the trades around with several different banks. When the banks began asking the fund about the size of its positions, it typically claimed any single holding was no more than 35% of its capital; in truth, prosecutors said, its holdings in Viacom at one point were equivalent to 96% of its capital.

‘Working the Orders’

It also involved buying up shares purely to keep their price aloft, prosecutors charged.

The scheme began to unravel on March 23 of last year, prosecutors said, the day Viacom announced a secondary stock offering. Shares began to decline in anticipation of more stock coming onto the market; Viacom was such a key holding to Archegos that Hwang attempted to defend the price by engaging in “an extraordinary amount of trading” in an effort to overpower the market. Though Halligan questioned the strategy, Hwang told his traders to “just keep working the orders,” according to the indictment. The effort failed.

Prosecutors said Hwang typically invested through cash equity purchases until the size of his positions approached 5% of the outstanding shares of a company. Once it neared that threshold, he would then switch to a new method of trading to avoid public disclosure of his holdings.

Using a so-called “total return swap,” he would then enter into contracts with banks that would pay out if share prices increased, but impose costs if they went down. In some cases his positions equated to more than 50% of the outstanding shares of the companies he invested in, according to the indictment.

“They lied, a lot,” U.S. Attorney Williams said Wednesday. “They lied about how big Archegos investments had become, they lied about how much cash Archegos had on hand, they lied about the nature of the stocks that Archegos held. 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.”

(Updates with potential prison sentence in third paragraph.)

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