US authorities have spent months gathering evidence to back up their claims that Bill Hwang, founder of the family office that collapsed Archegos Capital Management, used his company to fuel a market manipulation scheme that sent shock waves through stock markets. US stocks
Archegos’ high-profile implosion caused billions of dollars in losses for investment banks and wiped more than $100 billion off the valuations of nearly a dozen companies. But legal experts say prosecutors may still have a hard time proving the manipulation charge, which requires them to convince a jury beyond a reasonable doubt that Hwang intended to artificially inflate share prices beyond ordinary supply and demand.
The purchases alone would not necessarily constitute illicit activity, experts said, which could make the market manipulation charge against Hwang, 58, difficult to prove.
“If the intent is simply to move the price, is that just a case of criminal manipulation?” asked a senior white-collar crime attorney. “It’s a pretty nuanced and complicated question. This case is a good vehicle for the government to raise this.”
Market manipulation is among 11 criminal charges brought by US prosecutors against Hwang, who was arrested and charged in parallel criminal and civil cases on Wednesday. He has also been charged with extortion and fraud.
Hwang’s top lieutenant and former finance chief, Patrick Halligan, was also arrested and charged, but not with market manipulation. Both have pleaded not guilty.
Manipulation charges often appear in civil cases, which have a lower burden of proof compared to criminal proceedings, brought by agencies such as the Securities and Exchange Commission or the Commodity Futures Trading Commission. Even then, government lawyers have fought to keep the charges up.
A case involving successful Wall Street trader John Mulheren three decades ago is widely seen as a rare example of criminal stock manipulation charges. His conviction was eventually overturned because the jury’s decision was based on speculation and scant evidence.
The Mulheren case “dramatically illustrates the problems of prosecuting manipulation cases,” said James Cox, a professor of corporate and securities law at Duke University.
The SEC, which filed a civil case against Archegos and Hwang on Wednesday, said in its lawsuit: “None of these transactions were based on a principled view of the actual value of a particular issuer and were instead intended to inflate artificially price stocks”.
It also alleged that Hwang ignored his research analysts and ordered Archegos to trade before markets opened or in the last 30 minutes of the trading day to maximize market impact.
Cox said this was a “control moment” for US authorities as the case would not be “a knockout” due to the “enormous evidentiary challenge” of distilling reams of evidence and exchanging data in a format understandable to jurors. .
The case will be even more complex because the alleged manipulation at Archegos, whose capital skyrocketed from $1.5 billion in March 2020 to $35 billion a year later, involved corporate giants listed on America’s largest stock exchanges in rather than more typical targets such as smaller companies listed in shallower markets, he added.
However, “while the targets of the manipulation are unusual, the sheer volume that a single trader was doing was extraordinarily unusual,” Cox said. “In some respects, the government may be helped by the unusualness of the case.”
At one point, Archegos owned or had derivatives exposure to more than 50 percent of the outstanding shares in the media company ViacomCBS, now known as Paramount Global.
Jacob Frenkel, a partner at Dickinson Wright, said: “The burden of proof is entirely on the government. But prosecutors typically don’t charge unless they hope to win based on the evidence. . . The magnitude of the death and the description of the conduct suggest that this will be an uphill battle for the defendants.”
Prosecutors also enlisted the cooperation of Archegos’ chief risk management officer and principal trader, who both pleaded guilty. If the case goes to trial, their potential testimonies could be critical to the outcome of the process. They were accused of lying to banks along with Hwang and Halligan in order to receive billions of dollars that were used to inflate the companies’ share prices.
Hwang’s lawyer said the investor was “totally innocent of any wrongdoing” and that the accusations were “exaggerated.”
Halligan’s attorney said he was innocent and “will be exonerated.”
At trial, prosecutors could try to focus on the defendants’ alleged web of lies rather than delving into complex financial transactions to win over the jury. But major investment banks could become unattractive victims in the eyes of jurors, court observers said.
This may also explain why authorities did not file bank fraud charges, Frenkel said. “By failing to report bank fraud, the government is mitigating the defendants’ possible argument that the banks looked the other way or had some sort of complicity,” he added.
Instead, authorities said the defendants’ alleged false statements to banks and brokerage houses constituted racketeering, which caught legal experts off guard since that charge is typically used against organized crime.
John Coffee, a professor at Columbia Law School, said the harsh forfeiture penalties attached to US organized crime laws may be “the number one reason” authorities included this charge. “That’s what really sets us apart. [them].”