In the spring of 2021, the investment firm Archegos Capital Management, led by its founder and CEO Bill Hwang, collapsed, leaving Wall Street banks facing significant losses. Bill Hwang, a 60-year-old with a history of legal troubles, will stand trial on charges of racketeering, conspiracy, and fraud related to the collapse of his firm. The collapse of Archegos shook Wall Street as it occurred during a time of cheap capital and a strong bull market fueled by the Federal Reserve’s interventions. Advocates for market reform are using the Archegos collapse as a warning about the lack of regulation of family offices, private firms wealthy individuals use to manage their wealth.
Archegos built up large bets using financial instruments called “total return swaps” to gain exposure to certain stocks without actually owning them, leading to inflated values for stocks like Viacom and Discovery. While using these swaps is legal, it is risky and controversial, with the potential for deep-reaching implications. Hwang and his team allegedly misled banks they were borrowing from and concealed their large positions through the swaps to evade government regulations. As the stock prices fell, Hwang faced margin calls from banks demanding more collateral, leading to the firm’s positions being liquidated and losing billions owed to banks like Credit Suisse.
Bill Hwang, the son of a Korean pastor, is a devout Christian who has been accused of presiding over a toxic culture at Archegos that valued employee submission and adulation. He reportedly pushed his faith on his staff, required a portion of their bonuses to be invested in the firm’s deferred compensation plan, leading to significant losses when the firm collapsed. Hwang’s criminal trial, beginning this week, is not his first brush with the law, as he pleaded guilty to wire fraud related to his previous hedge fund, Tiger Asia Management, in 2012. His latest charges suggest a tougher stance on fraud, holding Hwang and his associates personally accountable under criminal laws.
White-collar crimes like those associated with Archegos may seem like distant problems for most Americans, but they can impact individuals with retirement funds. The Archegos charges indicate that the Department of Justice is cracking down on financial fraud, with Hwang facing significant prison time if found guilty. Dennis Kelleher, CEO of Better Markets, a nonprofit advocacy organization, points out that lax regulatory policies allowed excessive risk into financial markets, enabling the collapse of Archegos. The trial of Bill Hwang and its outcome will be closely watched by Wall Street and advocates for market reform as a potential warning for future financial misconduct.
