Finance

The Rise and Fall of Archegos: An Insider's Perspective

In the bustling world of high finance, the quest for a harmonious work-life balance often proves elusive. This pursuit, however, prompted Jesse Martz, a 32-year-old employee of PricewaterhouseCoopers in 2019, to transition into what he believed would be quieter waters—a relatively unknown family office. Little did he know, this shift would place him at the center of one of the most shocking financial maelstroms in recent times.

A Witness to Financial Turmoil

On a Wednesday in Manhattan federal court, Jesse Martz took the stand as the second prosecution witness in the case against Archegos Capital Management's founder, Bill Hwang. Facing charges of alleged fraud and market manipulation, Hwang watched as Martz recounted the chaotic energy permeating the firm during its tumultuous final days in March 2021.

On trial, the communications once internal to the firm found their way into the courtroom. "Gonna be a bloodbath," forecasted Martz in a chat from March 25, 2021, directed to his colleagues on the Archegos operations team. This message, now a piece of evidence for the jury, underscored the desperation and foreboding that had seeped into the company's ranks.

Despite his junior role at Archegos and limited interaction with Hwang and the banks that faced a shocking $10 billion fallout from their trading with Archegos, Martz spent a considerable amount of his time testifying about intricate spreadsheets and financial reports. These documents laid bare the rapid unraveling of Archegos in the final days of March 2021.

Prior to Martz's testimony, the court heard from Bryan Fairbanks, a former risk manager at UBS Group AG. Fairbanks painted a grim picture of Archegos's final week from a counterparty's vantage point, recalling the dawning realization of the impending calamity through a series of frantic calls with senior Archegos staff, and ultimately, with Hwang himself.

Documenting Disaster

Martz's role in the courtroom was to navigate the jury through the catastrophic numeric tale of Archegos's demise. Leveraging capital borrowed from banks, Archegos boasted $36.3 billion in assets, which Hwang aggressively channeled into an astounding $163.5 billion in gross exposure by March 22, 2021. Martz detailed how, within mere days, the empire evaporated, prompting the swift notification to Archegos staff to seek employment elsewhere.

"The level of intensity and stress was palpable," Martz conveyed to the jurors, recounting the surge in trading volume and activity that contributed to a harrowing work environment during those last days.

Martz described the Archegos he initially joined as laid-back and manageable. His duties largely involved trade processing and data entry for financial reports utilized by Hwang and his team. Early in his tenure, trading was sporadic—Hwang would at times spend a week without altering his portfolio.

However, by 2021, the climate at Archegos had undergone a dramatic shift. Martz recalled that Hwang had imposed stringent controls over who in the firm had access to detailed trading reports. This level of secrecy happened concurrently with the explosive rise of meme stocks, such as GameStop Corp.

Security Measures and Withheld Earnings

During cross-examination, Hwang's defence attorney, Barry Berke, suggested that Archegos's increased security measures were a reaction to the early 2021 spectacle of meme-stock trading frenzy. Not able to recall the exact rationale behind the tightened security, Martz did confirm that the topic of soaring stocks like GameStop had been the subject of intra-firm conversations.

Martz revealed that amidst the chaos of Archegos's impending implosion, employees were instructed to disregard the mounting, urgent margin calls from banks—calls that foreshadowed the severe repercussions to come.

Speaking about compensation, Martz recounted how he earned a salary of $145,000, complemented by a $70,000 bonus in his last year with Archegos. In an ironic twist, a quarter of his earnings was supposed to be invested back into the firm. Unfortunately, Archegos's collapse left Martz $40,000 short, of which he only managed to reclaim $3,000 after agreeing to a legal settlement that precluded further claims.

The Upcoming Testimonies

The trial's duration is expected to accommodate the accounts of multiple counterparty witnesses. The spotlight will eventually fall on Archegos's former head trader, William Tomita, and ex-chief of risk management, Scott Becker, both of whom have pleaded guilty to offenses. As they take to the stand, their insights could prove pivotal for the prosecution's case against Hwang and co-defendant Patrick Halligan, Archegos's former Chief Financial Officer.

The courtroom proceedings are part of a broader narrative examining the financial conduct and transparency—or the lack thereof—of investment firms. The case, formally listed as U.S. vs. Hwang, 22-cr-00240, continues to unfold in the U.S. District Court of the Southern District of New York, located in the heart of Manhattan.

As the jury and the public alike wait for the unfolding of the trial’s next phases, the revelations of Martz and Fairbanks have set a grim but intriguing stage. It's here that the intersecting narratives of operational chaos and stringent security measures merge, sketching a picture of a company cornered by its own clandestine strategies and catastrophic financial gambits.

©2024 Bloomberg L.P. Find more information about this ongoing legal battle and other related news at Bloomberg: https://www.bloomberg.com.

In conclusion, the crumbled empire of Archegos serves as a fortuitous reminder of the intrinsic volatility and unpredictability of stock markets meshed together with corporate ethics. It casts a scrutinizing light on protocols of risk and asset management amongst privately operated firms. As former employees like Martz painstakingly recount their experiences, they provide a window into the dramatic upswings and downfalls that define the fiscal landscape, leaving the economic community and bystanders eagerly awaiting the ultimate verdict in the saga of Archegos Capital Management.