Justice Department Opens Probe into Potential Bank Cartel that Financed Archegos

By Pam Martens and Russ Martens: May 27, 2021 ~

BusinessWeek Cover, May 13, 2002

BusinessWeek Cover, May 13, 2002

Last evening, Bloomberg News, followed by the Wall Street Journal, reported that the U.S. Department of Justice has opened a probe into the late March collapse of the Archegos family office hedge fund.

The Wall Street Journal reported that “Banks that lent to Archegos, including Credit Suisse Group AG, UBS Group AG, Goldman Sachs Group Inc. and Morgan Stanley,” had been contacted for information by the Justice Department.

According to media reports, Archegos is believed to have leveraged $20 billion of its own capital into more than $100 billion in stock and derivative exposure through margin loans from the banks named above, as well as others.

Among the laundry list of items the Justice Department may be investigating, is whether the banks violated the Federal Reserve’s Regulation T, which would have limited the banks to an initial margin loan of no more than 50 percent of the purchase price of the stock that Archegos was buying.

The banks apparently believed they could avoid Regulation T by cooking up a derivatives contract called a swap agreement that purported to magically allow the banks to claim ownership of the stock positions in SEC filings while allocating the gains and losses on the positions to Archegos.

During the leadup to the Wall Street crash of 1929, Wall Street banks formed “pools,” which were actually cartels to drive a bull run or a bear raid in a particular stock. There is a striking similarity between the pools of the late 1920s and what was happening at Archegos.

For example, while the banks were providing all of that leveraged lending to Archegos, the prices of the handful of stocks it was buying were skyrocketing. But when Archegos collapsed, so did the prices of the stocks held by Archegos.

According to reporting in the New York Times, Archegos owned “$20 billion in shares of ViacomCBS,” which made this obscure hedge fund the single largest institutional shareholder of the company. But this information was withheld from the public because the banks were reporting ownership of the shares on their own 13F filings with the SEC.

The Times’ report indicates that the $20 billion value held by Archegos in ViacomCBS shares occurred “mid March.” Using an average ViacomCBS price between March 15 and March 19 of $96, that would mean that Archegos owned 208,333,333 shares of ViacomCBS. According to the April 2 proxy filing for ViacomCBS, as of March 26 it had 605,267,057 Class B shares outstanding, meaning that Archegos owned a stunning 34 percent of the outstanding shares of an S&P 500 company without anyone being the wiser.

While Archegos was buying ViacomCBS, its shares went from a range of $30 in November of 2020 to more than $100 in March 2021 – more than tripling in share price. But when Archegos couldn’t meet margin calls with the banks, the share price of ViacomCBS collapsed, as did the hedge fund.

But as this tangled scene was playing out, ViacomCBS and its Wall Street bank underwriters decided to take advantage of the high share price to issue more stock to the public.

The October 1996 Cover of Registered Rep Magazine. Taped Phone Calls of Traders Showed a Wall Street Cartel That Rigged Prices.

The prospectus filed with the SEC by ViacomCBS for a secondary offering on March 23 of this year to sell approximately $1.67 billion of its Class B common stock and approximately $1 billion of its Series A Mandatory Convertible Preferred stock, had six Joint Book-Running Managers: Morgan Stanley, JPMorgan Securities, Citigroup Global Markets, Goldman Sachs, Mizuho Securities, and Siebert Williams Shank & Company.

Among the joint book-runners, Morgan Stanley, Goldman Sachs, and Mizuho have acknowledged being prime brokers (providing financing and other services) to Archegos.

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