Yahoo Finance ‘Groundhog Day’ Trading Built Risk at Archegos, Witness Says
(Bloomberg) -- Once Archegos Capital Management founder Bill Hwang decided on a trade, he did it again. And again. And again. Senior staffers reacted by greeting each other with “Happy Groundhog Day,” a reference to the classic Bill Murray time-loop comedy.
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That was the vivid picture of nonstop trading that Scott Becker, Archegos former chief risk officer, painted on the stand Monday in Manhattan federal court. He’s one of the prosecution’s star witnesses in the trial of Hwang and former Archegos chief financial officer Patrick Halligan.
Becker, 40, is expected to be on the stand for most of the week. The defense has already signaled it will cross-examine him aggressively. In her opening statements, Halligan’s lawyer, Mary Mulligan, called Becker manipulative and “a very, very convincing liar.”
Read more: Criminal Case Against Archegos’s Bill Hwang Explained: QuickTake
Those lies, Becker testified, were ultimately at the behest of Hwang, who was trying to convince the banks to increase his credit so he could trade still more.
“I lied to banks to induce them to make loans to Archgeos to pursue its trading,” Becker said.
He described in particular how Archegos built its position in the Chinese online education company then known as GSX Techedu Inc., buying swaps on its shares on all but four days of September 2020. It got to the point where every day felt the same, he said.
Hwang was trading “nonstop, all day, everyday,” Becker said.
Archegos’ highly leveraged and concentrated bets on a few companies would result in a spectacular meltdown in March 2021, wiping out more than $30 billion of Hwang’s fortune and costing its counterparty banks $10 billion.
Lying to Goldman
Becker was the person who persuaded many of those banks to continue trading with Archegos, and he described some of the lies he told them to increase the family office’s credit limits, even as some began expressing concerns about the risk. On Monday, Becker described lying to UBS Group AG, Goldman Sachs Group Inc. and BMO Bank of Montreal.
Becker has already pleaded guilty to several felonies and is cooperating with the government in hopes of leniency when he’s sentenced. William Tomita, 40, the former head trader at Archegos, has also pleaded guilty will also testify against his former bosses. Prosecutors claim the two men both were part of a “corrupt core” at Archegos along with Hwang and Halligan.
On the stand, Becker testified that in late 2020 and early 2021 Archegos was buying up so many swap transactions that it was bumping up against counterparty restrictions on portfolio concentration. He said he had begun to send a daily email showing capacity limits and that Tomita told him he was using the data in his own report to Hwang every evening.
He also told the jury that by early 2021 the firm’s margin rates had gone up to as much as 100% for stocks such as ViacomCBS, Baidu and GSX, from about 15% for long securities and 7.5% for short trades earlier.
Archegos grew desperate for new trading partners to beat the concentration caps, Becker told the jury. Goldman Sachs Group and Bank of Montreal both became counterparties during this period, he said. He told the jurors about conversations he had with Goldman, which became an Archegos counterparty in November 2020.
‘A Good Lie’
“They had a lot of questions, many of which surrounded Archegos’ portfolio,” Becker testified. He said that he lied to them about the size of its largest position, claiming falsely that it was 35% of equity — a figure he said he’d provided to other banks.
Goldman later told Tomita and Becker that it had noticed that the largest holders of GSX were other banks. Those shares would have been purchased as hedges to Archegos’ swaps, but Tomita said he’d noticed the same thing and that bank holdings had it made it harder for Archegos to invest more in GSX.
“I thought that was a good lie to address a question like that from a counterparty,” Becker testified.
Becker also described how the family office courted Bank of Montreal. He told the jury about a late 2020 Zoom call in which the Canadian bank said it had decided not to become an Archegos counterparty, partly because of concerns about the firm’s volatile performance. On the call, Tomita urged the bank to reconsider, saying Archegos was hoping for a “long-term partnership” and suggesting that a $100 million placement “might be a good first step,” Becker testified.
The bank became a counterparty in February 2021, he said.
Archegos was unsuccessful in attracting Citigroup Inc., JPMorgan Chase & Co. and Bank of America Corp.
The 35% Rule
Becker said lying wasn’t a new practice at Archegos. He described how, in one 2017 call, Halligan told a counterparty that Archegos’ largest position accounted for 35% of capital.
“Was that true?” prosecutor Alexandra Rothman asked.
“No, it was not,” Becker answered. He said he could see Halligan looking at the correct data but misstating the numbers to the bank. Becker testified that Halligan told him he shouldn’t disclose any number above 35% even if true.
“That number’s ambiguous, and they don’t know how to calculate it anyway,” he said Halligan told him.
That number came up again when Becker testified that he told then-UBS risk manager Bryan Fairbanks in a March 8, 2021, call that Archegos’ position in ViacomCBS shares was about 35% of its equity. In reality, it was more than 84%.
‘Do What Bill’ Says
Fairbanks took the stand last week and was asked then what the bank would have thought if it had known the true scale of Archegos’ exposure to the one stock.
“We would’ve been horrified,” Fairbanks said.
Becker reported directly to Halligan, and the defense has suggested that he had minimal contact with Hwang. On Monday, Becker testified that Archegos had a very top-down culture in which Hwang made all major decisions and disagreement wasn’t tolerated.
Hwang “would be involved in all decisions, even small decisions such as office furniture or art that would be hung up in the office,” Becker said.
“The main role of employees of Archegos was to do what Bill told you to do,” he added.
--With assistance from Ava Benny-Morrison.
(Adds details on margin rates and capacity in second section and on courting Bank of Montreal in third.)
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