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Look, a lot of people took up hobbies in the early  stages of the pandemic. People were making pasta,  

they were cutting their own hair, buying dogs that  they could clean up after – things like that. Now,  

one of the most popular hobbies was (of  course) retail trading in meme stocks,  

and that exact hobby turned out to  be the undoing of Bill Hwang.  

I can’t help but think that all was  going well for Bill, and then he fell  

under the influence of Dave Portnoy, and  decided it was time to go all in. Stonks  

only go up – as Bill probably used to say... So anyhow, this week, US federal authorities  

arrested and charged Bill, the founder of Archegos  Capital Management -which is a family office – not  

a hedge fund as is often reported, with executing  a vast scheme to manipulate stocks. He has been  

arrested on federal racketeering, fraud and  market manipulation charges. Which is bad…  

It would appear that Bill’s core investment  strategy was to pick a basket of around ten  

stocks, and then using leverage from around  a dozen prime brokers buy an awful lot of  

them. As his buying pushed up the prices of  these stocks, he had mark to market profits.  

He would then use these profits, to get even more  leverage from the banks, to buy even more of these  

stocks. This made the prices go up even more,  which created more profits, which gave our hero  

more money to buy more of the same stocks. I guess  the idea was that this could continue on forever  

in an infinite loop, but sadly for Bill, that is  not what happened, but he did have a great run.  

Bill used total return swaps and lots of leverage,  all of which were kindly provided by his prime  

brokers to build ginormous positions in stocks  including ViacomCBS, Discovery and a number  

of Chinese companies listed on US exchanges. Over the course of less than a week in late March  

2021, the whole house of cards collapsed leading  to huge losses at many of the prime brokers.  

So what went wrong? Well, on March 22, 2021.  Viacom CBS whose stock Bill had pushed up a lot,  

announced a secondary stock offering – basically  to take advantage of the high stock price and  

raise some additional capital. This new supply of  stock caused the stock price to sink the next day.  

This was Bills largest position and according to  the indictment, he mounted a massive offensive to  

boost Viacom, attempting to overpower the market.  The $2.6 billion in trading that he did that day  

consumed all of Archegos' cash meaning  that they would not be able to meet  

their margin calls if the offensive failed. And (of course) Viacom continued to fall.  

Over the next two days, according to the  complaint, Hwang and his team scrambled  

to stall the banks from calling in their margin  loans. On March 26, he ran out of time. The banks  

began unwinding the trades, sending the  shares tumbling. The game was over.  

When we look at the complaints you can see that  in March 2020, Archegos had $1.6bn in capital  

and $10.2bn in gross stock market exposure. So, he  was trading big to begin with, but those figures  

exploded to $36bn and $160bn, respectively  just before the collapse in March 2021.  

There is no mention of Dave Portnoy, or Wall  Street Bets in the charges and Bill has said  

nothing about his boredom during the pandemic,  but I think we can all guess what happened.  

Among the victims, according to the criminal and  civil complaints, are the Wall Street banks that  

Archegos deceived concerning its liquidity and  trading positions. Hwang’s attorney states that  

Bill is entirely innocent of any wrongdoing. The biggest loser in this whole debacle was  

of course Credit Suisse, and I’m not sure that  it is entirely fair to blame Bill for that. In  

many ways it could be argued that being involved  in scandals and taking losses in this manner was  

Credit Suisse’s hobby during the pandemic. I have  heard that at Credit Suisse they initially wanted  

to take up making homemade pasta, but there  was a shortage of pasta machines early on,  

and so huge losses it was. In truth, the losses at  Credit Suisse can reasonably be blamed on supply  

chain disruptions as much as anything else. Now, before I go any further, let me quickly  

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The SEC and the CFTC have brought parallel  civil cases against Archegos and Hwang.  

The SEC complaint says that in March 2021  Archegos’s derivative and stock positions  

in ViacomCBS accounted for more than half of  the company’s freely tradeable stock. He owned  

70% of the outstanding shares of GSX Techedu  and 60% of the outstanding shares of Discovery  

This is what lockdown boredom did to Bill. Anyhow, when we look at the various accusations  

possibly the most significant one is that Bill  is accused of deceiving his counterparties to  

extend leverage well beyond what their risk  tolerance would have otherwise permitted  

had they known the truth.” He was allegedly able to get  

away with this this because of his use of  derivatives. According to the complaints,  

Archegos would typically first invest in the  common stock of a company it wanted to bet on.  

And only when their ownership approached 5 per  cent of the overall business — a threshold that  

would trigger regulatory disclosures, they  would switch to using total return swaps.  

With these swaps, Archegos could make or lose  money depending on if a stock rose or fell,  

but the bank they entered the swap agreement  with, would show as the actual owner of  

the of the shares – the bank would have to buy  the shares to hedge their exposure to the swap.  

The bank would own the shares but  pass on their return to Archegos.  

This trading style allowed Archegos  to not only hide its ownership,  

but they also provided leverage. Bill went  from assets of $1.6bn to more than to $36bn  

in just 12 months. At one point, Archegos owned or  had derivative exposure to more than 50 per cent  

of the outstanding shares in the media company  ViacomCBS, now known as Paramount Global.  

Taking large positions like this in a  stock, and avoiding the disclosure rules  

is most likely illegal whether he used swaps or  not. I pointed out in a recent video that Elon  

Musk broke the law by waiting ten days longer  than is legally permitted to disclose his 5%  

stake in Twitter, which allowed him to accumulate  an additional stake at a cheaper price,  

saving him – and costing shareholders who sold to  him $150 million dollars. What Hwang is accused of  

doing here is significantly worse. I’m not sure,  but I don’t believe the use of derivatives allows  

you to avoid disclosure like this. We will  have to see how the court case works out.  

The SEC complaint points out that  “from January through March of 2021,  

Archegos’s trading of the equities  of and “securities based swaps”  

referencing its Top 10 Holdings frequently  exceeded 20%, often reached 30%,  

and even surpassed 40% of certain issuers’ daily  trading volume. They go on to say that Hwang knew  

that trading in large volumes on a given day would  create upward pressure on the share prices and  

would often result in the share price increasing. It is not necessarily obvious that this is  

actually market manipulation though.  Anyone who buys a lot of stock will  

push up the price and there is not really any  rule that says that your trading has to have  

no market impact. Additionally, there is  no rule as to what percentage of daily  

volume you are allowed to trade. Most traders  typically aim to minimize their market impact,  

simply because it reduces your returns to  move a stock much when buying and selling it.  

Amusingly, when the SEC describe the  manipulative trading that occurred,  

they say he would buy in the premarket, when  liquidity was low, in the middle of the day,  

to keep the price up, and at the close to “mark  the close.” When we sum that up, it essentially  

tells us that he would buy all the time. What you doing Bill? I’m buying stonks!  

The SEC later say that “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.” Once again,  

I’m not sure that you have to show that you bought  a stock based on good and thorough research.  

According to the complaint, in June 2020,  when asked by a colleague whether the relative  

resilience in ViacomCBS shares “was ‘a sign  of strength’” on a day when the broader stock  

market was falling, Hwang texted: “No. It is a  sign of me buying.” He added the emoji for tears  

of joy or laughing, according to the complaint. Now, I’m not a lawyer, but it would appear that  

the SEC view this emoji as being possibly key to  at least part of their case, as the statement “No.  

It is a sign of me buying.” Is just a statement of  fact – buying a lot of a stock will push its price  

up – but maybe the SEC feel there is something  that can be read into the emoji – after all they  

do include it. It is lucky for Hwang that he  didn’t send a text saying – The price is rising  

because I am illegally manipulating the stock to  make money - and adding a devil emoji, as that  

statement might be more difficult for his lawyers  to defend. If nothing else, we must commend Bill  

on his texting restraint and diplomacy. I should add, that Bill is a 58 year old,  

deeply religious man, so I’m guessing that his  lawyers can get around any emoji related charges  

using what I believe is known as “The Boomer  defense.” They can put forth that 58-year-old  

men have no idea what any emojis mean – other  than maybe the happy face and sad face ones.  

It is a bit like when it came out years ago  that David Cameron signed off all of his  

text messages with LOL Dave, apparently,  he thought LOL stood for “Lots of Love”.  

Like I said though, I’m not a lawyer, and  I know nothing about emoji precedents.  

Now, it would appear that the most  serious allegations against Archegos  

is that they lied to their banks and brokers  about their stock positions and their overall  

finances. Whether you are manipulating stock  prices or not, it is illegal to lie to your  

banks in order to get them to lend you money. The SEC complaint says that Archegos claimed  

to representatives of Credit Suisse, in  substance, that as of November 30, 2020,  

the largest gross position in Archegos’s portfolio  made up 35% of Archegos’s capital, and this was  

untrue according to the complaint. At the time,  Archegos’s largest long position ViacomCBS made  

up approximately 96% of their overall capital.  In fact, according to the SEC, as of that date,  

Archegos had six positions that were greater than  35% of capital. – These numbers sum to more than  

100% because of the leverage involved. The Department of Justice allege in their  

indictment that while trying to persuade  UBS to increase their trading limits,  

Hwang’s team claimed that Archegos could unwind  their entire portfolio in around a month without  

serious market disruption. In reality, according  to the Department of Justice, Archegos would  

have needed well over 100 days to do this. Archegos is additionally accused of claiming  

in substance, that the portion  of their portfolio held at UBS  

was not representative of their overall portfolio  with other counterparties, and that their largest  

portfolio positions were large, liquid technology  socks, like Amazon, Google, Microsoft, and Apple.  

In truth – according to the complaints - none of  these stocks ranked in their top ten positions.  

UBS, which lost $861mn from the debacle, ended up  raising Archegos’s trading limits by around $2bn  

“based in part on these  misrepresentations”, according to the DoJ.  

A central problem here is that each bank only  knew about Archegos's positions that were held  

at that specific bank. For this reason, it  might have seemed sensible for Archegos to  

have a billion dollar position in a single stock,  but not if they have an identically large position  

in that stock at every other major bank or  brokerage. In such a situation, if Archegos  

defaulted – like they eventually did, all of the  counterparties would be selling the same stocks  

all at once and in size, tanking the stocks. Banks  were very aware of this risk, and asked Archegos  

about it, and Archegos is accused of lying. Now, we can’t ignore the fact that the banks,  

that ended up taking a hit, were shot with  a weapon that they had provided to Archegos.  

They created these swaps and provided access to  them, knowing that they could be used to conceal  

outsize positions and provide  an insane amount of leverage.  

The mess that ensued has led to calls for better  disclosure of swap holdings which currently avoid  

the tough rules that apply to ordinary shares. At the start of the COVID pandemic, one of the  

biggest fears of bank and hedge fund executives  was that if staff were allowed to work from home,  

there might be a lot of  “rogue trader” style losses.  

The theory was that a lack of effective compliance  oversight combined with cabin fever could lead  

to people losing their sense of proportion  and taking foolish and inappropriate risks.  

This is possibly what happened with Hwang.  Before the pandemic, he used to hold  

regular strategy meetings and talk to his  analysts, arguing about investment cases and  

valuations. The complaints state that once he  was confined to his home, he began “essentially  

ignoring his analysts recommendations” and “spent  almost all of his workday with the traders”.  

This seems to be when he started believing  far too much in his own ability and took  

on an investment strategy that a moment’s  reflection would have shown to be insane.  

It’s notable, that the other big losers in trading  during the pandemic were retail options investors,  

the other group of people who had nobody  advising them, and who formed online  

communities that were informationally  airtight against any disagreement.  

The thing with this whole story  is that I still have no idea what  

Hwang was thinking? He is a bright guy, and  he must have understood how this would end.  

The SEC’s and Justice Department’s story is that  he bought a lot of stock to make the stock go up  

so he’d have paper profits to plow into  buying more of the same stock. Fine, but,  

what then? If he was doing this to manipulate  the price, what was his overall plan – was there  

a point where he was supposed to run away with  the money leaving the banks holding the bag?  

He was doing this with his own money and appears  to have lost it all. We have to wonder what the  

end game was? The strategy, as laid out by the  SEC and DOJ, inevitably ends in ruin, and it did.  

How was he planning to make money? Based on the complaints, Bill Hwang is accused  

of trying to manipulate these stocks up as high  as they could go, essentially to achieve a high  

score, knowing that shortly thereafter he would be  entirely wiped out and go to prison for fraud.  

He would not be the first person to do something  crazy like this I guess, but he would be the first  

to do it in this kind of size. It’s a strange  idea and it doesn’t make an awful lot of sense.  

I don’t have a great alternative for you  either though. Maybe “He just liked the stock”  

Don’t forget to check out our sponsor  The Daily Upside, by clicking on the  

link in the video description. It’s a great  newsletter that I can firmly recommend.  

If you haven’t watched it yet, here  is a link to my video on the top ten  

Rogue Traders. Hwang didn’t make that  list, as the video predated his losses,  

but there are a lot of funny stories in there. See you later, bye.