(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 (NASDAQ:PARA), which is now Paramount Global, and Discovery (NASDAQ:WBD), now part of Warner Bros Discovery.
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.