Securities and Exchange Commission v. Hwang

Background

The Securities and Exchange Commission alleged that Sung Kook (Bill) Hwang, Patrick Halligan, William Tomita, Scott Becker, and Archegos Capital Management LP participated in two related schemes from September 2020 through March 2021. First, the Commission alleged that Archegos used large, concentrated, leveraged equity and security-based swap positions, together with trading practices such as high-volume trading, “setting the tone,” “marking the close,” bidding up securities, and counteracting selling pressure, to create artificial prices for securities in its largest holdings. Second, it alleged that Archegos personnel gave eight counterparties false or misleading information about the portfolio’s size, concentration, and liquidity to obtain more favorable margin terms and additional capacity for swap trades.

The Commission asserted claims under Section 17(a) of the Securities Act, Section 10(b) and Rule 10b-5 of the Exchange Act, and Section 9(a)(2) of the Exchange Act. It also asserted aiding-and-abetting claims against Halligan and control-person liability against Hwang. The opinion treated the allegations in the amended complaint as true for purposes of deciding the motions to dismiss. The opinion states that Becker and Tomita had pleaded guilty in a related criminal case and that judgments had been entered against them in this civil case.

Motions to Dismiss

Archegos, Hwang, and Halligan moved to dismiss under Rules 8, 9(b), and 12(b)(6) of the Federal Rules of Civil Procedure. Rule 12(b)(6) asks whether a complaint plausibly states a claim; Rule 9(b) requires fraud to be pleaded with particular details, including the alleged statements or acts, who made them, when and where they occurred, and why they were fraudulent.

The court held that the Commission plausibly alleged market manipulation against Archegos and Hwang. The alleged swap activity could support a manipulation claim even though counterparties commonly bought the underlying shares to hedge their swap exposure. The court also held that open-market trading may be manipulative when accompanied by an intent to create a false pricing signal. The allegations, including Tomita’s account of trading at Hwang’s direction and specific examples of trading in GSX and Baidu, were sufficient at the pleading stage.

The court also held that the alleged misrepresentations to counterparties were sufficiently connected to securities transactions. According to the amended complaint, counterparties granted additional capacity after receiving misleading information and Archegos then entered additional swaps. The court rejected the argument that statements about the riskiness of Archegos’s portfolio were too remote from the value or sale of the swaps. It did find that a general allegation that counterparties likely hedged by buying shares was insufficient by itself, but concluded that more specific allegations involving Counterparties 1 and 4 stated a claim.

Halligan’s Claims

The court granted Halligan’s motion as to the Rule 10b-5(b) claim because the Commission did not plausibly allege that he acted with the required fraudulent intent when he signed transaction confirmations. The court also granted his motion as to the Rule 10b-5(a) and (c) claims and the Securities Act Section 17(a)(1) and (3) claims. Those claims alleged that Halligan was primarily liable for a deceptive scheme based on his role in preparing or supervising statements disseminated by others. Relying on Second Circuit precedent, the court concluded that the allegations did not show that Halligan himself engaged in the required manipulative or deceptive act.

The court denied Halligan’s motion as to the aiding-and-abetting claims under Counts 4 and 5. It held that the Commission plausibly alleged a primary securities-law violation by Becker, Halligan’s knowledge of Becker’s false statements, and substantial assistance through Halligan’s direction and supervision of the alleged communications with counterparties.

Hwang’s Claims and Control-Person Liability

The court rejected Hwang’s arguments concerning the alleged misrepresentations. Although Hwang could not be liable as the maker of statements made by Tomita or Becker, the Commission alleged that Hwang signed a portfolio-swap document containing a material representation and knew that Archegos’s exposure exceeded the stated threshold when he signed it. The court also held that the allegations concerning Hwang’s direction of trades and instructions about information provided to counterparties adequately alleged the required fraudulent intent or recklessness.

The court rejected Hwang’s Rule 8 argument that the amended complaint failed to identify the claims and conduct at issue. It also allowed the control-person claim under Section 20(a) of the Exchange Act to proceed. The court concluded that the Commission plausibly alleged primary violations by Archegos and Tomita, Hwang’s control over them, and Hwang’s culpable participation in the alleged conduct.

Intervention and Discovery Stay

The United States moved to intervene and stay discovery because of the parallel criminal case. Hwang and Halligan opposed that motion; Archegos and the Commission took no position. The court granted the motion, finding that the United States had an interest in preventing discovery in the civil case from circumventing the more limited discovery available in the criminal case. It also found that the factual and legal overlap, the status of the criminal case, and judicial-economy concerns justified staying discovery.

Disposition

The court denied Archegos’s motion to dismiss in its entirety, denied Hwang’s motion to dismiss in its entirety, and granted Halligan’s motion to dismiss in part and denied it in part. The court granted the United States’ motion to intervene and stay discovery. The Clerk was directed to mark the case as stayed pending further order.