Bill Hwang case puts prosecutors’ market manipulation claim to the test

US authorities have dedicated months to amassing evidence to support their claims that Bill Hwang, founder of collapsed family office Archegos Capital Management, used his firm to feed a market manipulation scheme that sent shockwaves across the US securities markets.

The high-profile implosion of Archegos caused billions of dollars of losses for investment banks and wiped more than $100bn from the valuations of nearly a dozen companies. But legal experts say prosecutors may still struggle to provide the manipulation charge, which requires them to convince a jury beyond a reasonable doubt that Hwang intended to artificially inflate stock 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, challenging to prove.

“If the intent is merely to move the price, is that alone a criminal manipulation case?” asked a senior white collar crime lawyer. “It is a pretty nuanced question and a complicated one. This case is a good vehicle for the government to raise this.”

Market manipulation is among 11 criminal counts 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 racketeering 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 feature in civil cases — which have a lower burden of proof versus criminal proceedings — brought by agencies such as the Securities and Exchange Commission or the Commodity Futures Trading Commission. Even then, government lawyers have struggled to make the accusations stick.

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 of him was ultimately overturned on grounds the jury’s decision was based on speculation and scanty evidence.

The Mulheren case “dramatically illustrates the problems of prosecuting manipulation cases,” said James Cox, professor of corporate and securities law at Duke University.

The SEC, which brought a civil case against Archegos and Hwang on Wednesday, said in its complaint: “None of this trading was based on a principled view of the true value of a particular issuer and instead was intended to artificially inflate share prices.”

It also alleged Hwang ignored his research analysts and directed 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 “gut check moment” for US authorities as the case would not be “a slam dunk” because of the “huge evidentiary challenge” of distilling mounds of evidence and trading data into an understandable format for jurors.

The case will be all the more complex because the alleged manipulation at Archegos — whose capital ballooned from $1.5bn in March 2020 to $35bn a year later — involved corporate giants listed on America’s biggest exchanges rather than more typical targets such as smaller companies trading in shallower markets, he added.

However, “while the targets of the manipulation are unusual, the sheer volume 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 exposed to more than 50 per cent of outstanding shares in media company ViacomCBS, now known as Paramount Global.

Jacob Frenkel, partner at Dickinson Wright, said: “The burden of proof is entirely on the government. But prosecutors typically do not charge unless they expect to prevail based on the evidence. . . The magnitude of the demise and the description of the conduct suggests that this will be an uphill battle for the defendants.”

Prosecutors have also been aided by the co-operation of Archegos’s director of risk management and head trader, who have pleaded guilty. If the case goes to trial, their potential testimonies could be critical to the proceedings’ outcome. They were accused of lying to banks together with Hwang and Halligan to receive billions of dollars that were used to inflate companies’ share prices.

Hwang’s attorney said the investor was “entirely innocent of any wrongdoing” and that the allegations were “overblown”.

Halligan’s lawyer said he was innocent and “will be exonerated”.

At trial, prosecutors might seek to focus on the defendants’ alleged web of lies rather than delving into complex financial transactions to win the jury over. But top investment banks might make for unattractive victims in jurors’ eyes, court watchers said.

This may also explain why authorities did not bring a bank fraud charge, Frenkel said. “By not charging bank fraud the government is mitigating the potential argument for the defendants that the banks looked the other way or had some form of complicity,” he added.

Authorities instead said the defendants’ alleged misrepresentations to banks and brokerages constituted racketeering, taking legal experts by surprise as that charge is typically used against organized crime.

John Coffee, professor at Columbia Law School, said the tough forfeiture penalties linked to US racketeering laws may be “the number one reason” authorities included this charge. “That’s what really is distinctive about [them].”

Leave a Reply

Your email address will not be published. Required fields are marked *