(Bloomberg) -- Archegos Capital Management founder Bill Hwang will defend himself against fraud and market manipulation charges by making a time-honored Wall Street argument: he’s not responsible for the other side’s losses.

Wall Street banks including Credit Suisse AG, Morgan Stanley and Nomura Holdings Inc. lost some $10 billion acting as prime brokers for Hwang’s family office. At opening statements Monday in the Manhattan federal court trial of Hwang and his chief financial officer, Patrick Halligan, prosecutors will argue that the two duped the banks into fueling an epic $160 billion bubble that burst when Archegos collapsed in March 2021.

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Defense lawyers will aim to depict Archegos’ trading strategy as legal and normal for an investment firm, stressing that it was a family office not required to disclose its positions. At the same time, they will try to convince the jury that the banks’ decisions were completely their own. Key to that will be trading data that the defense says will show Archegos’ counterparties didn’t act in predictable ways.

“Archegos could not control what these very sophisticated financial institutions did,” Hwang’s lawyer, Barry Berke, said at a hearing last month.

But the defense faces an uphill battle. Similar arguments haven’t worked for other Wall Street defendants accused of trading misconduct. And Hwang faces a huge problem in that two of his former top Archegos associates have already pleaded guilty and are expected to take the stand against him as the prosecution’s star witnesses. Testimony from inside Sam Bankman-Fried’s inner circle proved devastating to the FTX co-founder at his fraud trial last fall.

Both Hwang and Halligan are charged with racketeering conspiracy and fraud counts, while Hwang is also facing charges of market manipulation. They face up to 20 years in prison on each of the counts against them.

Defense Limits

According to prosecutors, Hwang schemed to inflate the share price of several stocks, most notably the company then known as ViacomCBS, on which Archegos had placed highly leveraged derivative bets. The government claims Hwang knew the banks would hedge his swap trades by buying the underlying stocks themselves, driving their prices up. The shares collapsed when the banks liquidated their positions all at once after Archegos missed margin calls.

But Hwang and Halligan’s lawyers say trading data shows the banks didn’t always hedge Archegos’ positions on a one-to-one basis. Instead, they frequently hedged “on a portfolio- or book-wide basis, often selling the hedges if offsetting swaps existed or lending the stocks out to short sellers,” defense lawyers said in court filings. That, in their view, undermines the prosecution’s contention that Hwang could manipulate the banks. 

The defense will have to walk a fine line in directing the jury’s attention to the banks. US District Judge Alvin Hellerstein, who is overseeing the case, has already said he will limit the defense’s ability to cast blame back on the banks by arguing that they are “sophisticated” players.

Denying responsibility for his counterparty’s actions didn’t work for Glen Point Capital co-founder Neil Phillips at his October market manipulation trial. Accused of orchestrating $725 million in trades to intentionally raise the value of the South African rand against the US dollar and trigger a $20 million option, the hedge fund manager argued that his “barrier-chasing” was a standard industry practice that counterparty Morgan Stanley recognized and took steps to parry with its own trades. 

The jury convicted Phillips after only a few hours of deliberation. Likewise, several traders accused of “spoofing” have failed to convince juries that their trades were legitimate and that they had no wrongful intent.

Archegos Cooperators

Hwang’s biggest challenge at trial will be the two cooperating witnesses — Archegos’ former head trader, William Tomita, and its former head of risk management, Scott Becker. Both men are expected to testify that Hwang directed them to lie to counterparties. 

Defense lawyers have so far given little indication of how they’re planning to handle Tomita and Becker on the stand. Standard tactics in dealing with cooperating witnesses include suggesting that they’re shifting blame from their own misconduct or that they’re lying to avoid prison. 

At Bankman-Fried’s trial, cooperating witnesses led by Caroline Ellison, the chief executive officer of FTX-affiliated hedge fund Alameda Research as well as his ex-girlfriend, and Gary Wang, his FTX co-founder and onetime math camp roommate, all testified that he directed them to commit fraud. After Bankman-Fried was convicted, his top legal adviser said such testimony made the case “almost impossible” to win.

Hwang also has a history that could hurt him with the jury if it comes up at trial. He launched Archegos as a family office in 2013 after he was barred from handling client funds when his previous hedge fund, Tiger Asia Management, pleaded guilty in an insider trading case. Though he neither admitted nor denied wrongdoing, Hwang himself agreed to pay $60 million to resolve claims.

Counterparty Witnesses

Court filings suggest prosecutors want Tomita and Becker, who both worked at Tiger Asia, to testify about what happened there and connect it to Hwang’s actions at Archegos. The defense has asked Hellerstein to bar such testimony as prejudicial.

Along with Tomita and Becker, prosecutors have said as many as 27 potential counterparty witnesses could be called to describe their banks’ interactions with Archegos. That could give the defense a chance to turn the jury’s focus back on the banks’ own actions. 

In particular, defense lawyers have suggested they’d like to bring up Credit Suisse’s internal report on its Archegos losses, which faults the bank’s own risk management staff for failing to act on warning signs. 

Prosecutors have already argued that defense should not be allowed to raise the report as part of a “blame the victim” defense. Hellerstein indicated he agreed with that position, but the judge left the door open for it come up on cross-examination of potential Credit Suisse witnesses. 

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

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