888 7th Ave, a building that reportedly houses Archegos Capital is pictured in the Manhattan borough of New York City, New York, U.S., March 29, 2021.
888 7th Ave, a building that reportedly houses Archegos Capital is pictured in the Manhattan borough of New York City, New York, U.S., March 29, 2021. Reuters / CARLO ALLEGRI

Archegos Capital Management founder Bill Hwang on Wednesday was released on bail after pleading not guilty to U.S. criminal charges over the meltdown of his New York private investment firm, which left global banks with $10 billion in losses. Archegos, which had $36 billion in assets, collapsed last year when it was caught short on highly leveraged trades.

Among the biggest fund blow-ups in years, the scandal roiled Wall Street, sparked a fire sale in stocks including ViacomCBS and Discovery Inc, and caused Credit Suisse, Nomura Holdings, among other lenders, to lose billions on their trades with Archegos.

Prosecutors alleged on Wednesday that Hwang amassed his huge equity exposures by lying to the banks to increase Archegos' credit lines. He then used derivatives he traded with them to manipulate the underlying shares and ratchet up his returns.

The U.S. Securities and Exchange commission, in a separate civil complaint also brought on Wednesday, said Hwang and Archegos "engaged in a brazen scheme to manipulate the market" and "propped up a $36 billion house of cards" through a cycle of manipulative trading and lying to banks to obtain additional loans.

"Eventually, the weight of Defendants' fraudulent and manipulative scheme was too much for Archegos to bear, and over the course of less than a week in late March 2021, the house of cards collapsed," the SEC said.

Hwang was arrested on Wednesday morning, along with Archegos Chief Financial Officer Patrick Halligan. Hwang pleaded not guilty to 11 counts including racketeering, market manipulation and fraud in Manhattan federal court on Wednesday afternoon. Halligan pleaded not guilty to three charges.

Lawrence Lustberg, a lawyer for Hwang, said in a statement that the case had "absolutely no factual or legal basis." He added: "Hwang is entirely innocent of any wrongdoing; there is no evidence whatsoever that he committed any kind of crime." He said Hwang had previously cooperated with the government.

U.S. Magistrate Judge Jennifer Willis ordered Hwang, who was wearing glasses and a green turtleneck, released on $100 million bond, secured by two properties and $5 million cash bail. His travel is restricted to the New York area, and he must attest to the court that he lost his passport.

Halligan was released on $1 million bond. His lawyer said Halligan is "innocent and will be exonerated."

'BRAZEN SCHEME'

Federal prosecutors in Manhattan said Hwang used a type of leveraged equity swap to manipulate the prices of seven of Archegos' portfolio companies, including Viacom, Discovery and Tencent Music Entertainment. At times, Hwang's leverage reached as high as 1,000%, authorities said.

Hwang was also able to exploit another regulatory loophole by trading through his family office, a type of private fund that does not have to register with the SEC, prosecutors said. That meant Hwang was not required to report information about his level of exposure to regulators, prosecutors said.

"These defendants committed this fraud in the darkness," U.S. Attorney Damian Williams of the Southern District of New York said at the news conference.

Hwang's dealers included Credit Suisse, Macquarie, Morgan Stanley, Goldman Sachs Group Inc, UBS AG, Nomura and MUFG. Spokespeople for the lenders, other than Deutsche Bank, either declined comment or did not respond to requests for comment.

"While we cannot comment on specific interactions and matters, the bank cooperates with law enforcement and our regulators," a Deutsche Bank spokesperson said, adding that thanks to the way the bank hedged its exposure, it did not suffer losses on its Archegos trades.

If proven, each charge carries a maximum prison sentence of 20 years, though any sentence would be imposed by a judge based on a range of factors. Hwang and Halligan make their next court appearance on May 19.

Prosecutors also brought charges against Archegos head trader William Tomita and Chief Risk Officer Scott Becker for their alleged roles in the scheme. Attorneys for Becker and Tomita did not immediately respond to requests for comment.

The pair pleaded guilty and are cooperating with prosecutors, officials said during a news conference.