Archegos Banks That Unwound Bets Face Criminal Antitrust Probe
(Bloomberg) -- The US Justice Department is ramping up scrutiny of banks that collectively lost billions of dollars in the collapse of Bill Hwang’s investment firm — mere months after scoring a conviction against him for deceiving those very firms.
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Prosecutors in the Justice Department’s criminal antitrust division have kicked back to life a dormant probe examining how Hwang’s lenders unwound more than $150 billion in bets placed by his family office, Archegos, according to people familiar with the matter.
Since Hwang’s trial, the department’s San Francisco office has made fresh inquiries, zeroing in on emergency talks the banks held in March 2021, where participants floated proposals to coordinate an orderly liquidation of their client’s portfolio to minimize their own losses, the people said.
The DOJ is probing if there was collusion or a conspiracy to collude to control prices in those chats. At least three banks — Credit Suisse, Nomura Holdings Inc. and UBS Group AG – reached a managed liquidation agreement to sell down parts of their Archegos exposure. Others like Goldman Sachs Group Inc., Morgan Stanley and Deutsche Bank AG explored such an agreement before deciding against it.
In the pantheon of Wall Street strategies, few have proved as costly as the short-lived attempt by Archegos’ trading partners to link arms in a managed unwind. The few that did reach an agreement ended up with the lion’s share of $10 billion in losses. One, Credit Suisse, later collapsed.
Now, the Justice Department might draw a second line under the lessons learned by declaring the strategy illegal.
It isn’t clear how long the inquiry may take or which banks, if any, might face charges. Spokespeople for the lenders and Justice Department declined to comment. The people with knowledge of the situation asked not to be named discussing a confidential inquiry.
The possibility that authorities could invoke the Sherman Act against Wall Street banks over solutions floated to deal with an emergency is certain to irk financial executives.
Though the 134-year-old law is commonly associated with crackdowns on monopolists, its first provision targets conspiracies to restrain trade. And for antitrust officials, the image of rival firms gathering to discuss keeping prices elevated may trigger concerns.
“The Justice Department says nothing justifies coordinating your decision-making on something that’s going to impact the value of or the price of a stock,” said Lisa Phelan, an antitrust attorney with Morrison Foerster in Washington and a former DOJ criminal antitrust chief.
“People might think it will be really helpful and good, but they should check. Generally DOJ is loathe to give an exception,” said Phelan, who isn’t involved in the case.
Deep Frustration
When news that antitrust authorities were poking around the Archegos debacle first emerged in mid-2021, many Wall Street professionals figured there was little to worry about — especially because banks pointed to the advice of lawyers throughout the episode.
Indeed, the probe soon seemed to taper off. But as federal prosecutors in Manhattan prevailed in their case against Hwang in July, antitrust officials sought more information.
The inquiries arrive at a moment of deep frustration among Wall Street executives with the government’s top antitrust authorities. Federal Trade Commission Chair Lina Khan’s opposition to some lucrative corporate transactions has made life tougher for investment bankers.
Meanwhile, the Justice Department’s top antitrust cop, Jonathan Kanter, has notched legal wins with an aggressive and unusually effective playbook.
Yet, so far, the Biden administration’s stepped-up antitrust enforcement has mainly targeted sectors beyond finance, including Big Tech, health care and airlines, along with monopolization cases against Alphabet Inc.’s Google and Apple Inc.
During Hwang’s fraud trial, prosecutors accused the one-time billionaire and some of his lieutenants of misleading banks while borrowing money to layer up bets on a small group of stocks, such as ViacomCBS, sending prices soaring. The banks realized too late that Archegos had fueled the run-up by buying swaps from several firms. Once prices started slipping, he and the banks faced a downward spiral of losses and liquidations.
That’s because banks had hedged the swap deals by buying the underlying shares. And that meant the firms would be left selling billions of dollars of the same stocks simultaneously, sending prices into tailspins before they could finish.
Enlisting Counsel
At one bank, executives were so queasy about potentially coordinating a winddown that they suggested to colleagues that attorneys should handle those talks, according to people with knowledge of their thinking. The Justice Department has expressed the view that the presence of lawyers on those calls doesn’t necessarily amount to a defense for the firms, one of the people said.
An internal review later published by Credit Suisse emphasized the heavy presence of lawyers throughout the conversations: “General counsel of the various banks and outside legal counsel were engaged to work through any regulatory and legal challenges, and counsel attended all calls.”
When no binding agreement was reached, firms including Goldman and Morgan Stanley flooded the market with shares to cut their exposures.
Soon after, on a Sunday, Credit Suisse, Nomura and UBS reached a deal to do a coordinated block of overlapping positions that was carried out over the next two weeks, according to the postmortem of the collapse commissioned by Credit Suisse. Credit Suisse alone put more than $5 billion of Archegos positions on sale as part of that effort while still using open-market, algorithmic trading to get rid of other positions.
That patience didn’t pay off.
Nomura ultimately lost almost $3 billion on its dealings with Archegos, while Credit Suisse took a $5.5 billion hit. That and other debacles eventually led to the Swiss bank’s collapse and emergency sale to UBS.
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