Ex-UBS Risk Manager Points Finger Squarely at Archegos ‘Lies’
(Bloomberg) -- A former UBS Group AG risk manager slammed Archegos Capital Management for its “lies” when he took the stand as the first witness at the fraud and market manipulation trial of Bill Hwang.
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Bryan Fairbanks, now head of prime risk services at BMO Bank of Montreal, on Monday described the internal debate at UBS over Archegos as a client and how Hwang’s family office allegedly deceived the bank about its investments.
He’s expected to return to the stand in Manhattan federal court Tuesday to discuss a recorded March 2021 call during which Hwang allegedly promised banks he could meet their margin calls and unwind his positions in a few weeks.
On the stand Monday, Fairbanks said he “probably would have hit the panic button” if he’d known that Archegos’ positions were as concentrated as they actually were. “We would have been very concerned,” he said.
Hwang is accused of lying to his counterparty banks as part of a scheme to inflate the value of stocks on which Archegos had placed highly leveraged derivative bets. Banks including Credit Suisse Group AG, UBS, Morgan Stanley and others lost some $10 billion when Archegos imploded in March 2021. The debacle was cited as one of the major factors in Credit Suisse’s collapse last year.
Fairbanks’ testimony offers a preview of what some of the 26 other potential bank witnesses on the prosecution’s list may say. Some of his statements also suggest the government isn’t running away from the warts on the bank’s own behavior — chiefly, that they knew Archegos was risky but decided to trade with it anyway.
‘All About the Benjamins’
During the opening statements that preceded Fairbanks’ testimony, defense lawyers took several shots at the banks. Hwang’s lawyer, Barry Berke, said the banks were “falling over themselves” to do business with Archegos. Mary Mulligan, the lawyer for Hwang’s chief financial officer and co-defendant, Patrick Halligan, was even more blunt.
“The evidence will show banks made sizable fees for dealing with Archegos,” she said. “Everyone had a big slice of the Archegos. Everyone wanted a slice.” It was “all about the Benjamins,” Mulligan added.
Fairbanks testified that one of his first assignments after joining UBS in 2010 was to close the account of Hwang’s previous hedge fund, Tiger Asia Management. Hwang launched Archegos as a family office in 2013 after Tiger Asia pleaded guilty in an insider trading case.
When Archegos sought to trade at UBS, Fairbanks said he thought the account had “hair on it,” meaning it would have a hard time being accepted as a client because of Tiger Asia’s history. But he said UBS decided to do business with Archegos anyway. The defense is likely to seize on that statement during cross-examination to highlight how the bank’s own decisions contributed to its losses.
Berke spent most of his opening statement trying to normalize Hwang’s trading behavior by calling to mind the most “normal” investors jurors might recognize — value investors in the mold of Warren Buffett.
In his lawyer Barry Berke’s telling, Hwang, 60, was investing in companies he believed in for the long term, and that he was willing to “lose it all” for those beliefs. And everything might have worked out, but for a “Black Swan” event that wiped out more than $30 billion of his own fortune in less than a week.
“He had this courage and conviction,” Berke told jurors in Manhattan Monday in his opening statement. “He believed in these companies and he believed in these investments.”
True Believer
Berke didn’t actually cite the Oracle of Omaha in his opening statement, but he said Hwang was guided by a classic investment text also often cited by Buffett, Philip A. Fisher’s Common Stocks and Uncommon Profits. It was about as far from the prosecution’s depiction of what Hwang did at Archegos as could possibly be imagined.
According to Assistant US Attorney Alexandra Rothman, who delivered openings for the government, Hwang built a “house of cards and lies,” driven by a singled-minded desire to pump up the stocks of the companies on which Archegos had placed its bets.
Hwang’s most notable bet was on the company then known as ViacomCBS. Berke argued that this was because he believed the company had a bright future in streaming with properties like Star Trek and the Mission Impossible movies. Part of the “Black Swan” that hit Hwang was a poorly received secondary offering by Viacom, which set off the rout that cratered Archegos’ position in the company, the lawyer said. In the same week, the Securities and Exchange Commission announced plans to regulate US-traded Chinese companies in which Archegos was also heavily invested.
While Berke depicted Hwang as an honest but ill-starred investor, the prosecution painted a darker picture.
Hwang “risked everything because he wanted more money, success and power,” Rothman said “To those in the know, he was a great investor. He had it all. But it wasn’t enough.”
‘Corrupt Core’
Rothman told jurors that Hwang worked with a “corrupt core” of Archegos employees to manipulate shares and lie to banks. That core included Halligan, former head trader William Tomita, and former risk management chief Scott Becker. Tomita and Becker have pleaded guilty to felonies and are expected to be the star prosecution witnesses.
Hwang’s lawyer suggested Tomita was saying what prosecutors wanted to avoid going to prison, while Mulligan hit Becker even harder. She called him “manipulative” and a “very, very convincing liar” in her opening statement.
Fairbanks’ testimony, however, threw the accusations of lying back at Hwang and Archegos.
“All the information they shared with us was lies,” he said, noting that UBS lost $860 million trading with Archegos.
He described in particular an internal discussion in February 2021 about raising the bank’s exposure to Hwang’s family office from $8 billion to $10 billion. Fairbanks said UBS was reassured by Archegos that it had 30-to-40% of its equity in free cash.
Prosecutor Samuel Rothschild asked Fairbanks what the bank would have thought if it had known Archegos had had more 75% of its equity in one position.
“We would’ve been horrified,” Fairbanks said.
The case is US v. Hwang, 22-cr-00240, US District Court, Southern District of New York (Manhattan).
--With assistance from Katherine Burton and Sridhar Natarajan.
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