Lawyers for Archegos Capital Management founder Bill Hwang are set to ask a federal judge Tuesday to throw out charges tied to the meltdown of the investment firm, saying federal prosecutors have mischaracterized legal trading as criminal market manipulation.
Archegos collapsed during a volatile stretch in the market in March 2021, leading to billions of dollars in losses for banks and investors. Federal prosecutors said Mr. Hwang built up big, concentrated positions in companies using swaps—derivative contracts struck with banks for a fee—that allowed him to inflate the prices of stocks in his portfolio and hide Archegos’s market power. When the fund fell, more than $100 billion in stock-market value vanished in a matter of days. Credit Suisse Group AG took more than a $5 billion hit.
The U.S. attorney’s office for the Southern District of New York in April of last year charged Mr. Hwang with racketeering, securities fraud and market manipulation, alleging he and others committed a manipulation scheme that nearly jeopardized the U.S. financial system. Mr. Hwang has pleaded not guilty.
Patrick Halligan, Archegos’s former chief financial officer, was also charged with securities fraud and racketeering. He has pleaded not guilty. Two other former Archegos employees have pleaded guilty for their role in the alleged scheme and are cooperating with federal prosecutors.
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U.S. District Judge Alvin Hellerstein is set to hear oral arguments on dismissing the charges on Tuesday. The trial is scheduled for Jan. 9, 2024.
Lawyers for Mr. Hwang have argued in court papers that the market-manipulation charges at the core of the indictment don’t meet legal requirements. Market manipulation is a type of securities fraud that involves defrauding investors by artificially affecting stock price.
The lawyers have said that market-manipulation charges require a deception, such as orders that aren’t ultimately executed, or a lie to the market. Mr. Hwang did neither, they said.
“The Government does not and cannot dispute that every trade alleged had a willing buyer, a willing seller, and exposed Mr. Hwang to a genuine risk of economic loss,” wrote Mr. Hwang’s lawyers. “Such trading has never supported a criminal market manipulation charge.”
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Prosecutors have said in a court filing that the law doesn’t require a lie or deceptive act. The intent to manipulate the market is sufficient, they said. “Trades that might be lawful if not accompanied by manipulative intent can nonetheless form an unlawful market manipulation scheme when that intent is present,” they said.
Whether what is known as open-market manipulation is illegal has been controversial, said Andrew Calamari, a former director of the Securities and Exchange Commission’s New York office. He said appeals courts hadn’t agreed on the issue. “The whole area is very garbled,” said Mr. Calamari, now at law firm Finn Dixon & Herling LLP.
“Historically, not disclosing your intentions has not been a basis for fraud,” said Mr. Calamari, who represented a defendant in what is called a spoofing case, in which prosecutors brought market-manipulation charges. “That seems to be changing.”
Arthur Jakoby, a former SEC prosecutor, said Mr. Hwang appears to have made dangerous trades and held an irrational exuberance about the value of stock he purchased, but that isn’t illegal.
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“Foolish trading is not a crime,” he said.
Prosecutors allege that when Mr. Hwang’s trades are looked at in the aggregate, they constitute illegal trading. But there was nothing illegal about each individual trade, said Mr. Jakoby, a partner at law firm Herrick, Feinstein LLP.
“That is a somewhat unprecedented legal theory,” he said.