The Fallout from Archegos Capital Management and More

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What risks do certain “family” offices pose to outside investors, considering most, if not all, of the money is the “family’s?” Well, as it turns out, quite a bit. The most recent one making headlines is Archegos, where the family office of Bill Hwang burned banks to the tune of $10 billion.

The WSJ reports, the losses are felt far and wide, not just at his dinner table.

The battering to Wall Street banks from Archegos Capital Management topped $10 billion after UBS Group AG and Nomura Holdings, Inc. reported fresh hits caused by the fund’s collapse.

Archegos, the family office of Bill Hwang, wreaked havoc across Wall Street when heavily leveraged bets it made on a small collection of stocks unwound, triggering huge losses at a half a dozen banks that had lent heavily to the investor.

UBS, Switzerland’s biggest bank by assets, said Tuesday it lost $861 million following Archegos’s implosion, a bigger hit than analysts expected.

Meantime, Japan’s Nomura, which flagged losses of around $2 billion last month, upped its total damage tally to $2.85 billion, leading to its worst quarterly performance since the end of 2008, during the global financial crisis.

Nomura said it had taken swift action to shore up its risk-management systems, and had found no similar dealings with other clients. The bank had exited more than 97% of the positions by April 23.

UBS Chief Executive Ralph Hamers, in the job since November, said the bank was reviewing its risk management systems to avoid such situations, but didn’t envision a broader pullback. He said the loss hadn’t stopped UBS from improving its capital position in the quarter and that the investment bank was able to bear the loss. UBS shares fell 2% Tuesday.

In addition to UBS and Nomura, Credit Suisse Group AG lost $5.5 billion, Morgan Stanley lost $911 million and Mitsubishi UFJ Group warned of a $300 million hit.

Altogether, the losses of more than $10 billion make it one of the worst trading incidents in finance in years and have prompted a flurry of regulatory investigations in the U.S. and abroad.

Then, you have a family office managing billions of dollars of the founder’s money after being suspended by the SEC for a couple years, only to be allowed back in. It was a two-year slap on the wrist as reported by Barron’s back in 2016:

Former SAC Capital boss Steven A. Cohen won’t be managing anybody’s money again…  until at least 2018.

That’s per a settlement struck with regulators over charges that deficient supervision at the hedge fund firm led to hundreds of millions of dollars in ill-gotten trading gains.

The Securities and Exchange announced the two-year suspension on Friday and said that Cohen’s family office firm, Point72 Asset Management, will be “subject to SEC examinations” and must retain an independent consultant.

The SEC found that Cohen and SAC failed to properly supervise Mathew Martoma, who last year started a nine-year prison sentence for insider trading. The SEC’s order found that Cohen “ignored red flags that should have caused him to take prompt action to determine whether Martoma was engaged in insider trading.  Instead, Cohen permitted Martoma to make trades based on that information, and Cohen placed similar trades in accounts that Cohen controlled.” Cohen didn’t admit or deny the SEC’s finding that he failed reasonably to supervise Martoma.

The Wall Street Journal has reported at length that regulators recently toned down their more ambitious quest to hand Cohen a lifetime ban:

“Prosecutors and regulators have investigated Mr. Cohen and his firm for the better part of a decade, eventually winning a guilty plea from the firm in 2013, but the SEC action against Mr. Cohen is the only instance in which he was personally accused of wrongdoing.”

Reuters obtained a memo from Cohen to Point72 employees, which states that resolving the case “gives us certainty and opens up a path to raising outside capital” down the road.

Action Line: Make sure you understand the “family” office you do business with (including inadvertent exposure through banks). When it’s all about gathering more money, make sure you protect yours.

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E.J. Smith - Your Survival Guy

E.J. Smith is Founder of YourSurvivalGuy.com, Managing Director at Richard C. Young & Co., Ltd., a Managing Editor of Richardcyoung.com, and Editor-in-Chief of Youngresearch.com. His focus at all times is on preparing clients and readers for “Times Like These.” E.J. graduated from Babson College in Wellesley, Massachusetts, with a B.S. in finance and investments. In 1995, E.J. began his investment career at Fidelity Investments in Boston before joining Richard C. Young & Co., Ltd. in 1998. E.J. has trained at Sig Sauer Academy in Epping, NH. His first drum set was a 5-piece Slingerland with Zildjians. He grew-up worshiping Neil Peart (RIP) of the band Rush, and loves the song Tom Sawyer—the name of his family’s boat, a Grady-White Canyon 306. He grew up in Mattapoisett, MA, an idyllic small town on the water near Cape Cod. He spends time in Newport, RI and Bartlett, NH—both as far away from Wall Street as one could mentally get. The Newport office is on a quiet, tree lined street not far from the harbor and the log cabin in Bartlett, NH, the “Live Free or Die” state, sits on the edge of the White Mountain National Forest. He enjoys spending time in Key West (RIP JB) and Paris. Please get in touch with E.J. at ejsmith@yoursurvivalguy.com To sign up for my free monthly Survive & Thrive letter, click here.

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