May 8 (Reuters) - The trial of former Archegos Capital
Management head Sung Kook "Bill" Hwang and his deputy Patrick
Halligan opens on Wednesday over their role in the failure of
the investment firm, which collapsed in a span of days in 2021,
causing billions of dollars in losses at global banks.
Hwang and Halligan pleaded not guilty.
WHAT ARE THEY ACCUSED OF DOING?
Authorities allege Hwang and Halligan lied to banks in order
to maximize Archegos' borrowing so the firm could manipulate
prices of its stockholdings, which included ViacomCBS, which is
now Paramount Global ( PARAA ), and Discovery, now part of Warner
Bros Discovery ( WBD ).
Prosecutors accused Archegos of using the borrowed money to
buy swaps, which further increased the firm's economic exposure
to the stocks. When prices for the shares began to fall, the
banks demanded repayment on the loans, which Archegos was unable
to do. The underlying stocks were sold by the banks, causing a
market rout.
Prosecutors say the sell-off wiped out more than $100
billion in shareholder value at the companies that Archegos bet
on and billions of dollars of losses at the banks that loaned it
money.
WHAT ARE THE SPECIFIC CHARGES?
Hwang faces charges of racketeering, securities fraud and
wire fraud along with seven counts of market manipulation.
Halligan is charged with racketeering, wire fraud and securities
fraud.
Each charge carries a potential 20-year sentence.
WHAT DO RACKETEERING AND MARKET MANIPULATION INVOLVE?
The Department of Justice said Hwang and Halligan committed
a racketeering conspiracy in which they set up an illegal scheme
for profit.
The market manipulation charges against Hwang allege that he
engaged in or directed transactions in securities and
securities-based swaps to raise or lower their prices and induce
others to purchase those securities.
WHAT DO THE FRAUD CHARGES ENTAIL?
Prosecutors allege the Archegos founder engaged in a
securities fraud scheme to build positions in stocks and
manipulate their prices.
Hwang and Halligan were both charged with securities fraud
of counterparties. Prosecutors contend they lied to multiple
banks about Archegos' assets to obtain more loans that funded
ever larger positions and kept the securities' prices inflated.
The two men were also charged with wire fraud of
counterparties. Wire fraud refers to fraud involving online and
telecommunications networks.
Prosecutors claim they made false and misleading statements
through these means to defraud Archegos' trading counterparties.
HOW MIGHT HWANG AND HALLIGAN DEFEND THE CHARGES?
Hwang and Halligan are expected to argue that prosecutors are
pushing a novel and nonsensical market manipulation theory.
Lawyers told Reuters that prosecutors were pushing the legal
boundaries in their market manipulation case.
Typically, market manipulation involves some kind of
trickery, and the defense legal teams may assert that the stock
purchases Archegos made in the open market did not involve
deception.