👁️ Bill Hwang Won't be Redeemed ... But He Might be Acquitted.

The alleged "pump and dump" at Archegos was crazy ... but was it fraud?

Welcome to Dark Markets, the newsletter about fringe finance. This is your news roundup for May 7. Today’s topics:

• Another Boeing Whistleblower Dead

• Binance’s CZ Sentenced

• SEC sues Robinhood

• Analysis in Brief: Did Archegos head Bill Hwang Commit a Crime?

Don’t forget our Dark Markets Podcast deep dive into the risks of crypto projects Ethena and Eigenlayer, with Zane Huffman of Bloq.

Bill Hwang is exactly the kind of guy we love around here - that is, a total weirdo.

News in Brief

Another Boeing Whistleblower Dead

Boeing either has the worst luck in the world, or it is actively silencing its internal critics. 45 year old Joshua Dean, described as having a healthy lifestyle, died within two weeks of contracting MRSA and influenza B which developed into pneumonia. Dean was a former quality control expert who recently reported the aerospace giant was circumventing safety controls.

Binance’s CZ Gets a Token Sentence

Changpeng Zhao, CEO of offshore crypto exchange Binance, will serve four months in U.S. federal prison as part of a deal that acknowledged failures of Binance to excercise good anti-money laundering and “know your customer” practices. Giving U.S. authorities transparency into Binance was another condition of the deal.

But most importantly, this is another huge loss for Sam Bankman-Fried, who fostered a weirdly personal and largely one-sided grudge against CZ, even before CZ bailed out of FTX’s token, FTT, revealing SBF’s massive fraud. As I’ve written countless times before, CZ may be no angel, but, much like BitMEX founder Arthur Hayes’ slap on the wrist before him, his light sentence suggests an acknowledgment that he’s not nearly as much of a bad guy as Sam was.

SEC Sues Robinhood over The Coins

Even before they’ve accomplished anything in their suit against Coinbase, the Securities and Exchange Commission is preparing to sue Robinhood for its cryptocurrency sales. The app-based brokerage revealed it had received a Wells Notice, warning of looming legal action.

This seems like a spectacularly bad decision by the SEC, if one they’ve painted themselves into a corner on. Robinhood isn’t a “crypto company” in the minds of many, so it’s unlikely to be seen as some low-rent con by a jury. At the same time, Robinhood has made significant attempts to work with the SEC, to “come in and register,” and what they get in return is a likely very expensive civil lawsuit. It won’t be hard to depict the SEC to a jury as acting irresponsibly, or even deceptively.

Could Bill Hwang Be Acquitted?

Bill Hwang is exactly the kind of guy we love around here - that is, a total weirdo.

Not just a devout Christian, Hwang is a performative zealot, who constantly infused his bizarre version of faith into his business. Archegos, his investment fund, was named from the ancient Greek term for “leader,” “used in the Bible to describe Jesus as the ‘author’ of salvation.” Notoriously, he commissioned a painting showing the blood of Christ literally bathing the New York City skyline. He allegedly punished employees who didn’t declare their love of God - and of Hwang.

In an interview in Korean, (highlighted by Christianity Today) he said:

“While reading the Bible I realized that God likes setting a fair value … Helping companies establish an appropriate market price by making investments and supporting them to do well is all part of doing God’s work.”

That is some absolutely grade-A heretical lunacy right there - the Prosperity Gospel on medical-grade cocaine, if you will.

Would you be surprised to learn that this fake Christian was allegedly a real fraudster?

“It’s a Sign of Me Buying!”

Jury selection in Hwang’s trial on fraud charges began this week at SDNY, and the main proceedings start next week. We’ll be covering at least a few days from inside the courthouse.

The contours of Hwang’s alleged fraud are complex and arcane, both in practical and legal terms. Over several years, Hwang accumulated large positions in a few stocks, including Viacom and Discovery. His positions were so concentrated that he effectively drove up their prices singlehandedly - a fact he seemed to acknowledge in an email, where he wrote that prices going up were “a sign of me buying.” On its own, this would be at best weird, because being so concentrated is a great way to get blown up - which is what eventually happened to Archegos.

But it’s complicated to argue that “buying a lot of the stock” amounts to fraud or market manipulation. To paraphrase Matt Levine, if you buy a stock because you think the broader market will send it higher, that’s a legitimate investment. If you buy a stock because you already own 50% of the floating supply and your next purchase will send that stake higher, that’s market manipulation.

Hwang and his defense team could simply argue that he bought a lot of stock because he liked the companies. And a jury could definitely buy that.

Lies, Damn Lies, and Leverage

But there are two other factors that make Hwang’s actions look more clearly fraudulent.

First, he wasn’t technically buying stock. Instead he was using swap contracts with multiple investment banks to take positions by proxy. This allowed him to bypass some very clear market controls - at one point, DOJ alleges Hwang controlled more than 50% of trading stock in Viacom. Normally, an investor has to publicly disclose ownership higher than 10% in a firm … partly to avoid exactly what happened with Viacom, which lost half of its market cap immediately after Archegos collapsed.

Second, and even more clearly damning, Hwang allegedly lied to the banks who were enabling his leverage. As DOJ puts it, Hwang lied to banks “about how big Archegos’s investments had become, how much cash Archegos had on hand and the nature of the stocks that Archegos held.” These lies let him borrow a ton of money to buy stock swaps - effectively, he was able to lever up.

As is universally true with frauds and manipulators, Hwang’s immense concentration and leveraged structure meant he could get knocked out by a stiff breeze. When that happened in March of 2021, it was the banks that had handed Hwang leverage that actually lost money – particularly Credit Suisse, which lost $5.5 billion, and collapsed not long after. Hwang wasn’t the only factor there, but he sure didn’t help. Other banks on the hook included Nomura, UBS, and Morgan Stanley.

There’s a close parallel, then, between Bill Hwang and the alleged activities of fallen crypto hedge fund Three Arrows Capital. Principals Kyle Davies and Su Zhu represented Three Arrows as essentially a “family office” managing its own funds, but were later revealed to have borrowed a lot of money to put into trades that went very bad. While Archegos put arrows into UBS and Credit Suisse, Three Arrows wounded the knees of crypto lenders like Voyager, Genesis, and Digital Currency Group (my now-former employer).

If You’re a VC, They Let You Do It

So lying to banks and lenders is bad, especially if you do it so you can pump up existing positions. If there’s proof of those lies (there will be), Hwang will be convicted of at least some of the charges.

But it will be considerably more challenging to convince a jury that his buying in and of itself was intended criminally, or that the swaps were specifically intended to conceal his positions. The trial may well include examination of Hwang’s investment theses for these companies, to help convince the jury that he was investing, not manipulating.

So I think there’s the real possibility of a split verdict.

Let’s take a final educational detour: What about venture capital? While they’re not (generally) engaged in the same kind of deception of banks or investors, VCs are (generally) pumping their own bags by doubling down with each successive “round” of investment. That is, they build up big concentrated positions in private firms over time, and by putting in more capital, they’re increasing the value of their old positions.

The two aren’t directly comparable, of course. But if you’re trying to play cautious, it’s worth keeping in mind when you hear about an exciting IPO. That asset has already arguably been “pumped” by VCs, and the stock market offering itself is the “dump.”