Morgan Stanley Was ‘Angry’ as Archegos Fell, Witness Says

(Bloomberg) — When Archegos Capital Management reached out about looming margin calls in March 2021, Credit Suisse took a “very soft tone,” while Morgan Stanley was “much harsher, angry.”

But both were responding to the same set of talking points for counterparties that Archegos Chief Financial Officer Patrick Halligan came up with on a Zoom call with founder Bill Hwang and several others, the firm’s former risk management head testified. It was Scott Becker’s second day on the stand as one of the star prosecution witnesses in the fraud case against Hwang and Halligan.

Becker, 40, on Tuesday gave jurors a look at Archegos’ final days from inside what prosecutors allege was the “corrupt core” of Hwang’s family office. That end came suddenly, he testified. Hwang launched an ambitious “project” to raise more cash just days before disaster struck. That quickly became a frantic but ultimately futile scramble, with banks being fed lies to buy time, Becker said.

In earlier testimony, Becker had described the intensive, almost nonstop trading that Archegos began engaging in late 2020 to build up its positions in a small handful of companies, including ViacomCBS and Chinese online education company GSX Techedu Inc. On Tuesday, he testified that he’d reached a breaking point by March 19, 2021, when he refused a request to travel to Hwang’s New York apartment to work on the new project.

Becker said he participated by Zoom though, and on a March 21 call, Hwang thanked him for helping out with the project — an analysis of how much cash Archegos could free up by moving its positions from higher-margin brokers to lower-margin brokers.

‘God Willing’

“God willing,” Hwang said on the call, Archegos would grow to $50 billion or $100 billion, Becker testified.

But two days later, a tepid response to a secondary offering at Viacom, Archegos’ biggest holding, sparked a downturn that was becoming a rout. The cash Hwang had sought to expand his positions was now desperately needed to prop up one of them and meet the inevitable margin calls.

The effort ultimately failed, and Archegos was wiped out when its counterparties liquidated their positions all at once, costing them some $10 billion. Before then though, Hwang directed his inner circle to find the cash that might let Archegos trade its way out of its hole, Becker said. On a March 23 Zoom call, Halligan told him to continue the weekend project. 

Becker updated his list of possible liquidations that night, but those sales never took place, he testified. Instead, the focus shifted to trying to get the banks to hold off on their margin calls. Becker testified that, on the evening of March 24, 2021, Archegos had $1.7 billion in excess cash available but expected margin calls exceeding that amount by $13 billion the next day. 

Liquidity, Not Solvency

In a Zoom call that night including Hwang, Halligan, head trader William Tomita and executive chairman Andy Mills, Archegos’ top management discussed how to deal with the banks. 

Becker testified that Halligan said they should call the banks proactively and say they were experiencing “a liquidity issue, not a solvency one.” According to Becker, Halligan said they should outline a general plan to liquidate trading positions and pay their creditors without being too specific. 

Hwang said they should make clear that because Archegos was a family office, there would be no outside investors demanding to withdraw capital. They should tell the banks Archegos was comfortable with its portfolio and that the companies were all “household names,” Becker said Hwang directed.

The information Archegos shared about its portfolio and how much cash it had on hand was mostly lies, Becker testified.

Credit Suisse was the first call, with Mills taking the lead. Morgan Stanley followed, then Nomura Holdings, Goldman Sachs Group Inc. and UBS Group AG. The calls were “substantially similar,” echoing the talking points agreed to in the Zoom meeting, Becker said, but he recalled that the banks’ reactions were different.

Credit Suisse was Archegos’ largest counterparty, and the $5.5 billion it lost as a result was cited as a major factor in the bank’s own collapse last year.

‘Zero’ Dollars

Becker said Credit Suisse’s representatives wondered how Archegos would meet its margin calls. Becker testified he felt “extreme discomfort” in taking the call with Credit Suisse, but that the tone was calm. The call with Morgan Stanley was the “complete opposite,” he said.

During the call with Morgan Stanley, he was communicating with Halligan via Bloomberg chat message. Becker testified that he asked the CFO what Archegos’ excess cash was then.

“Zero” dollars, he said Halligan told him.

Likewise, in the Goldman Sachs call, the Archegos team was asked how much the firm’s current capital was, Becker said. Halligan, who was on that call, responded “about $20 billion.” The true figure was around $17 billion, Becker testified.

Lawyers for Hwang and Halligan could begin cross-examining Becker as soon as Wednesday. It’s a prospect that promises fireworks as both men need to discredit his testimony if they’re to win acquittal. And it’s particularly critical for Halligan, who was Becker’s direct boss.

‘Most Transparent’

Earlier in the trial, Jesse Martz, a former junior member of the four-person Archegos operations team, testified that Becker had something of a “personal vendetta” with the CFO. In her opening statement, Halligan’s lawyer, Mary Mulligan, called Becker manipulative and told jurors he’s “a very, very convincing liar.”

Becker has already pleaded guilty to several felonies and is cooperating with the government in hopes of leniency when he’s sentenced.

Becker told jurors he lied in a February 2021 call with UBS in which he told the bank that Archegos’ top 10 positions were around 35% of capital, and that the whole portfolio could be liquidated in two weeks. 

Prosecutors pointed to documents that showed its Viacom position was around 67% at that time. The two-weeks estimate was also a lie, Becker said. 

But the lies were evidently convincing. On a subsequent call with Becker played for the jury, then-UBS risk manager Bryan Fairbanks praised Archegos as one the bank’s “most transparent” clients. 

“At Archegos, you did whatever you could so Archegos could pursue its trading strategy,” Becker said on the stand.

The case is US v. Hwang, 22-cr-00240, US District Court, Southern District of New York (Manhattan).

(Updates with detail about Credit Suisse in 15th paragraph)

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