Before Bill Hwang sent a slate of stocks on a manic climb last year, he had already started bleeding billions of dollars on a bearish bet after seeking Morgan Stanley’s help.
It’s an untold chapter that played out just before Hwang’s famously bullish trades came tumbling down in early 2021, wiping out his Archegos Capital Management and leading to criminal charges. Months before all of that, Archegos was trying to exit a wager against a Chinese online broker and sought help from Pawan Passi, the Morgan Stanley banker placed on leave as the US probes whether Wall Street is too loose-lipped when handling big trades.
Hwang had placed a massive short bet on Futu Holdings Ltd. using swaps, and wanted to close out his position around the end of 2020. He told Morgan Stanley he needed to buy a large block of shares to unwind the position, according to people with knowledge of the episode. But before Hwang managed to defuse the bet, Futu’s price skyrocketed, gaining more than 400% in the two months after that Christmas. That jump took an almost $4 billion bite out of Hwang’s portfolio.
Archegos alerted US authorities to that costly episode after the emergence of the block-trading probe this year, one of the people said. The firm has sought a review of whether someone at the bank might have tipped off outsiders to its plan to buy Futu stock in bulk.
Indeed, it remains unclear who squeezed Hwang’s short bet and whether they even knew they were targeting him. Futu’s price surge coincided with last year’s so-called meme stock frenzy, in which an army of retail traders organized themselves on message boards and set out to identify and lift shares targeted by short sellers.
Still, the review sought by Archegos is yet another way that big US probes of Wall Street keep intersecting. The government’s examination of whether financial firms are handling blocks discreetly was underway for a while before it ramped up in the wake of Archegos’s collapse and liquidation, people with knowledge of the matter have said. Now, Hwang is looking to make another link, turning the scrutiny back toward banks.
The US investigation of block trades does focus on whether Wall Street bankers have tipped off hedge funds to any pending deals. But Morgan Stanley, which has said it’s cooperating, hasn’t had any discussions with the government about a potential Futu transaction with Archegos as part of that inquiry, a person with knowledge of the matter said.
Neither Passi nor the bank has been accused of wrongdoing. Representatives for Morgan Stanley, Archegos and the Justice Department all declined to comment. Passi didn’t return a request for comment.
Ironically, within weeks of getting burned on Futu, Hwang became the scourge of other short sellers by driving up the price of Chinese online-education company then known as GSX Techedu Inc., which some of the world’s most famous short sellers were betting against. When Hwang was eventually outed as their antagonist, they cursed his name and publicly called for probes into that, too.
Passi canvassed the market through parts of January 2021. In the end, Morgan Stanley didn’t manage to acquire a large enough block of Futu’s stock to help Archegos unwind its ill-fated bets, the people said. The hit to Archegos’s portfolio was soon dwarfed by its highly leveraged gains on almost every other part of its portfolio, which in relatively short order soared, sputtered and crashed.
The Archegos and block-trading probes do have a common theme -- seeking to head off fraud and manipulation, US Securities and Exchange Commission Chair Gary Gensler noted in an interview last week. “It’s about protecting markets,” he said.