SEC, CFTC, and SDNY Charge Archegos Capital Management and Its Owner and Executives with Fraud: Implications for Family Offices
On April 27, 2022, the SEC filed suit against family office Archegos Capital Management, LP, as well as its Founder/Owner Sung Kook (Bill) Hwang, CFO Patrick Halligan, Head Trader William Tomita, and Chief Risk Officer Scott Becker with orchestrating a fraudulent scheme to inflate the value of its assets under management, which involved both false and misleading statements to security-based swap (“SBS”) counterparties and prime brokers, as well as manipulative trading practices.
As we have previously written, family offices are private companies which provide investment and other services to members of high-net-worth families. Pursuant to SEC Rule 202(a)(11)(G)-1, family offices may apply for an exemption from registration the Investment Advisers Act of 1940, provided they have no clients other than “family clients,” they are wholly owned by family clients and exclusively controlled by family members or family entities, and they do not hold themselves out to the public as an investment advisor. Archegos had received such an exemption.
From March 2020 to March 2021, Archegos purchased billions in SBS assets on margin. As explained in the SEC’s complaint, these swaps allowed Archegos to trade on the margin extended by its counterparties at very high leverage ratios of between 400% and 1000%. That is, where Archegos invested $100 in capital, it had up to $1,000 in exposure on the stock.
In addition to amassing substantial holdings on margin, the Complaint also alleges that Archegos regularly engaged in a series of transactions designed to manipulate the market for the securities the family office held, including by placing numerous transactions before the market opened to “set the tone” where liquidity was low, during the trading day to bid up prices, and in the final 30 minutes of the trading day to “mark the close,” which would enhance pricing for margin purposes.
Hwang, Becker, Tomita, and Halligan also allegedly each made misrepresentations to Archegos’s counterparties in order to gain more exposure on its main holdings. In particular, they consistently misrepresented to counterparties the makeup and liquidity of Archegos’s portfolio, as well as how concentrated Archegos’s holdings were in its top 10 positions.
Ultimately, during the week of March 22, 2021, stock price declines among Archegos’s top 10 holdings led several counterparties to issue significant margin calls which the firm could not meet. According to the SEC’s Complaint, Archegos’s defaults “resulted in billions of dollars in credit losses among its Counterparties and significant losses to the market participants who invested in the stocks at inflated prices.”
On the same day that the SEC filed its Complaint, the U.S. Attorney’s Office for the Southern District of New York instituted parallel criminal proceedings against Hwang and Halligan, charging conspiracy, securities fraud, and wire fraud. Becker and Tomita have already pled guilty to similar charges and are cooperating with the Government. The CFTC also contemporaneously filed fraud charges against Archegos and Halligan, and announced settlements with Tomita and Becker. This whole-of-government approach against both Archegos and its executives is consistent with the Department of Justice’s renewed focus on holding individuals accountable for white collar crime, so both corporate entities and their executives should take notice. It also demonstrates that the SEC and other regulators may place family offices under greater scrutiny, since cases like Archegos demonstrate that the fraudulent schemes involving the assets of high net worth individuals can have serious ripple effects through the credit, equity, and commodities markets.
 See Complaint, ECF No. 1, SEC v. Sung Kook (Bill) Hwang, No. 1:22-cv-3402 (S.D.N.Y. Apr. 27, 2022).
 17 C.F.R. § 275.202(a)(11)(G)-1.
 Compl. ¶ 15.
 Id. ¶¶ 1-2
 Id. ¶ 28.
 Id. ¶¶ 46, 74-85.
 Id. ¶¶ 86-96
 See id. ¶¶ 97-148 (describing misrepresentations to various counterparties).
 Id. ¶ 7.
 Id.; see also Noor Zainab Hussain & Elizabeth Dilts Marshall, Morgan Stanley reveals $911 million Archegos loss as profit jumps, Reuters (Apr. 6, 2021), https://www.reuters.com/business/finance/morgan-stanley-profit-blows-past-estimates-dealmaking-boom-2021-04-16/; Steve Goldstein, Nomura and UBS Become Latest to Report Archegos Losses, Barron’s (Apr. 27, 2021), https://www.barrons.com/articles/nomura-and-ubs-become-latest-to-report-archegos-losses-51619513531.
 United States Attorney’s Office for the Southern District of New York, Four Charged In Connection With Multi-Billion Dollar Collapse Of Archegos Capital Management (Apr. 27, 2022), https://www.justice.gov/usao-sdny/pr/four-charged-connection-multi-billion-dollar-collapse-archegos-capital-management.
 Commodity Futures Trading Commission, CFTC Charges Archegos Capital Management and Three Employees with Scheme to Defraud Resulting in Swap Counterparty Losses Over $10 Billion (Apr. 27, 2022), https://www.cftc.gov/PressRoom/PressReleases/8520-22.
 See Deputy Attorney General Lisa O. Monaco, Keynote Address at the ABA’s 36th National Institute on White Collar Crime (Oct. 28, 2021), https://www.justice.gov/opa/speech/deputy-attorney-general-lisa-o-monaco-gives-keynote-address-abas-36th-national-institute; SEC Division of Enforcement Director Gurbir S. Grewal, Remarks at Securities Enforcement Forum West 2022 (May 12, 2022), https://www.sec.gov/news/speech/grewal-remarks-securities-enforcement-forum-west-051222.