Our congratulations to Camelot Event Driven Fund for its settlement with the large prime brokers. as the $120m settlement of their Archegos case was validated by the judge.

The well-known case

The Archegos story is well known. Bill Hwang invested massively in Viacom, taking advantage of the leverage offered by his main prime brokers. His concentrated bet pushed the stock up. When Viacom announced a secondary share issuance to take advantage of this high price, the stock suddenly fell.

The Prime Brokers immediately called Archegos on margin, but the family office eventually verbally admitted that it could not pay. The banks ‘suddenly realized’ the extent of the leverage they had extended to their favorite customer. Since they had lent the cash, they would end up on the hook for massive losses; they quickly seized the fund’s assets and liquidated the Viacom shares.

Some prime brokers were faster than others. Jefferies had suspected the risk before the others and lost nothing. Credit Suisse lost $5.5 bn. Nomura lost $2.9 bn. Morgan Stanley lost $900 m… Overall, the prime brokers lost ~$10 bn in a few days. 

The banks then sued Archegos and Bill Hwang criminally to mitigate their losses. Hwang was sentenced to 18 years in prison and $9 bn of restitution.

The lesser-known case 

The investment banking divisions from three of those banks were also working with Viacom on that exact secondary stock issuance (due to Chinese walls, the investment bankers and the prime brokers were not talking to each other). The bankers actually had the secondary offering in progress, spanning several days – announcement, pricing, collection of firm orders, closing, and settlement.

When the senior managements put two and two together, they were between a rock and a hard place.

• Either they liquidated the shares quickly to protect prime, and they would hurt the investors participating in the offering,
• or they legally suspended/stopped the offering process, which takes time, and then sold the shares. They would have raked large losses in prime as the stock was cratering.

They chose to immediately sell the shares without suspending/stopping the offering. By doing so, they depressed the Viacom stock price, while investors were forced to buy the new shares at the offering’s (much inflated) stock price.

Litigation followed, as those investors tried to recollect on their investment losses.

Top legal and trading expertise.

This successful litigation for Viacom shareholders could not have happened without the expertise and experience of the top lawyers who handled this high-stakes case. We extend our respectful congratulations to Daniella Quitt, Kevin Ruf and Christopher Fallon at Glancy Prongay & Murray, as well as to John Rizio-Hamilton, Rebecca Boon, Nicole Santoro (now at Slarskey) and Alec Coquin at Bernstein Litowitz Berger & Grossman, in cooperation with Kroll, which handled the case support.

A key element in this process was to understand who knew what and when within the banks and compare it to the offering process. Reconstructing the timeline of events needed a deep knowledge of prime brokers and their top management. Not only did the expert witness need to know the standards, the regulations and the policies, but he also needed to master the nuances of risk management in this area, notably how prime brokers monitor the cash balances – and solvability – of hedge funds. Navesink International, the home of the best experts for financial markets, provided this expertise. Our expert had decades of experience in prime risks. He reconstructed the likely timelines within each of the banks. His understanding and inside experience were critical for the lawyers to leverage the power of the law.

Expert witnesses are impartial to the outcome of the cases they work on, but they do appreciate when their clients are satisfied with the service provided. Navesink International is delighted to have cooperated with and helped these top attorneys and law firms. We thank you for trusting us with your complex litigation. Please accept our tip of the hat for your work and accomplishment.

The Reuters article is indicated below, as well as at this link.

Our previous article on Archegos: Archegos: the questions nobody asks