Archegos founder's charity was financial 'escape pod', suit alleges

Bill Hwang, founder of Archegos Capital Management, has been charged by prosecutors after the collapse of the firm. Photo / Getty Images

Archegos Capital Management transferred shares worth hundreds of millions of dollars to a charitable foundation that became a financial "escape pod" for Bill Hwang when crippling investment losses forced the closure of his investment firm, according to a civil lawsuit filed in New York.

The recipient, Hwang's Grace and Mercy Foundation, sold the shares at a profit "within days", the lawsuit claims.

The implosion of Hwang's Archegos last year gripped Wall Street and led to billions of dollars of losses for several investment banks. The ease with which Hwang had managed to secure leverage from at least eight lenders, including Credit Suisse and Nomura, triggered scrutiny of their risk controls.

Federal prosecutors in April brought criminal charges of racketeering, fraud and market manipulation against Hwang, calling Archegos an "instrument of market manipulation and fraud". They accused the money manager of using highly concentrated bets to drive up the share price of the companies it backed, only to suffer huge losses when brokers called in their margin loans.

The civil lawsuit filed on Tuesday by former Archegos managing director Brendan Sullivan is the first to allege that Hwang insulated himself financially as he pursued his frenzied buying campaign. It also sheds light on the inner workings of Hwang's firm.

Sullivan's complaint described Archegos as a "personality cult" that rewarded unwavering dedication to its founder and God, adding that Hwang ran the firm as his "personal fiefdom" with the sole purpose of becoming "the richest person in the world".

A lawyer for Hwang declined to comment. Hwang has pleaded not guilty to the federal charges against him.

Sullivan is seeking to recover US$50 million ($81.2m) in deferred bonuses. Some of the money, he alleged, was wrongly transferred to Grace and Mercy, which he characterised as an "alternative cash vehicle where Hwang and select 'good followers' could go and be insulated from creditors in the event Archegos failed".

According to Sullivan, Hwang often described himself as "the money guy who teaches the Bible to pastors" and exhibited "megalomaniacal delusions of grandeur, entitlement, and a brazen willingness to break the law".

The lawsuit traces the arc of Hwang's career, including his rise as a protégé of the legendary hedge fund manager Julian Robertson, his US$44m settlement with the Securities and Exchange Commission on insider trading charges and the subsequent launch of Archegos. It describes a brazen attitude to investing where Hwang sought to generate "extraordinary returns . . . even if he needed to break the law to do so".

The Financial Times reported in August that Archegos employees were facing losses of about half a billion dollars after the value of the deferred pay plan crashed along with its other investments.

Hwang's aggressive trading tactics backfired in March 2021 as ViacomCBS, now known as Paramount Global, fell by almost a third in just a few days, hitting the value of Archegos's holdings.

New York-based Archegos quickly unravelled, losing billions of dollars that included Hwang's own wealth as well as money contributed by employees as part of a mandatory plan set up by the firm. According to the lawsuit, employees were told that the deferred bonus scheme, as it was referred to, would be protected and there was "no downside risk".

In March last year, Hwang convened a firmwide call to discuss the crisis, according to Sullivan's lawsuit.

Archegos co-chief executive Andy Mills, who is named as a defendant in the lawsuit along with Hwang and others, warned employees that they should not resign in the hope of triggering a contractual clause that allowed leavers to demand repayment of their deferred compensation.

Mills could not immediately be reached for comment.

"Deferred comp is zero," he said on the March 2021 call, according to the complaint. "[It] no longer exists."

Written by: Ortenca Aliaj and Mark Vandevelde

© Financial Times