Archegos and banks in settlement talks amid bulk trade probe

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Archegos Capital Management and global banks are in negotiations to avoid a protracted court battle that would expose details of the deals that led to the collapse of the family office, according to three people familiar with the matter.

The potential legal battle is over billions of dollars in swap deals between banks such as Morgan Stanley and Credit Suisse and the family office run by former hedge fund manager Bill Hwang, which spectacularly imploded last March.

The talks to agree a truce come as financial watchdogs and the US Justice Department widened a wide-ranging investigation into apparent irregularities in Wall Street’s lucrative practice of trading large blocks of shares.

Authorities are investigating whether banks broke rules when they negotiated “block trades” – privately selling large amounts of shares to hedge fund clients – including when Archegos failed last year last.

Morgan Stanley, which was heavily exposed to Archegos and was one of the first to put up for sale large blocks of shares it held on behalf of the investor, revealed last week that the Securities and Exchange Commission had been examining the bank’s block trading activities since 2019 and that the Department of Justice recently launched its own investigation.

Six banks that provided services to Archegos through their main brokerage divisions – Credit Suisse, Nomura, Morgan Stanley, UBS, MUFG and Mizuho – lost around $10 billion when they liquidated the family office’s positions in US listed companies such as ViacomCBS after the failure of Archegos. respond to margin calls.

Morgan Stanley and Goldman Sachs, which was one of Archegos’ top brokers but said it suffered no material losses from the collapse, sold about $19 billion worth of large blocks in one day. The banks had themselves purchased and held these shares in swap transactions they executed for Archegos.

A number of banks have threatened legal action against Archegos to recover some of the money they lost on its sour bets last March.

However, Archegos has warned the banks that it will reject their claims, which could lead to a lengthy and public legal process, according to one of the people.

Archegos also said she could mount her own lawsuit that the banks behaved illegally in their dealings with her, the person said. He allegedly claims banks were ‘negligent’ when they allowed the family office to accumulate vast amounts of leverage and prime brokers ‘encouraged’ him to borrow up to $50 billion in debt. actions, they added.

“When a judge has [ruled on the matter] it’s five years later and it’s all been debated publicly in court,” the person said.

The delicate situation prompted negotiations to resolve the proposed claims out of court. The talks are approaching a crucial moment as an injunction preventing Archegos’ creditors from forcing it into bankruptcy in an attempt to collect what is owed to them expires at the end of March.

“Settlement negotiations basically boil down to ‘we don’t have the money but if we find any we’ll pay you,'” said one of those involved in the talks. They added that it was unlikely that any of the banks would try to force the involuntary bankruptcy of the family office. “There’s no point in doing it. Assets are being recovered and contracts are being unwound and profits are being distributed as appropriate,” the person added.

But a second person familiar with the matter said there was ‘simply not enough money to cover the banks’ deficits’ and added that they believed there was only ’50/50 chances” that the settlement negotiations will succeed.

A person close to Archegos said he had not been contacted by authorities investigating the banks’ block transactions. The Justice Department is separately investigating the family office collapse, and the Securities and Exchange Commission launched a preliminary investigation into Hwang last March.

Morgan Stanley, Nomura, UBS, Credit Suisse, MUFG, Mizuho and Archegos declined to comment.

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