Charges in Spectacular Archegos Debacle

fed the inflation, and the inflation fed more lies. Round and round it went. The last year, the music stopped, the bubble burst, the prices dropped, and when they did, billions of dollars nearly evaporated overnight. Arkaegos founder James Wong and its chief financial officer, Patrick Halligan were arrested on Wednesday on securities fraud, racketeering and market manipulation charges. Joining me is James Park, a professor at u c l A Law School. This is being called one of the

highest profile white color prosecutions in recent memory. Do you agree? I agree, simply because of the size of the alleged market manipulation, something that I think the extent of which, in my mind, seemed unimaginable until it actually happened. And

it's also a very ambitious case. In my view, market manipulation is very difficult to identify and define, and so the case in my view, is forging ahead in new areas and could not only affect the individual defendants in the case, but it could also create lawed expectations for the way that creating happens on Wall Street. The U S attorney said the scheme was his oric in scope.

Can you explain what the scheme was? The theory was that he was manipulating the prices of stock that he was invested in very simply by buying huge amounts of stock using his own funds and also critically borrowed money, money that was borrowed from various investment banks, and simply by buying and buying. He was trying to drive the price up. He was buying at certain times the end of the trading day, when those trades would have a

larger impact. They were engaging in transactions before the market opened, when there's not a high volume of transactions, and so in some ways, the basic scheme is actually fairly simple. It's simply supply and demand. You know, the more you demand of a particular thing, the higher the price goes, and the alleged intent was to increase the price of his holding. A second element of the team was that in order to get the funds from the investment banks,

he lied about the condition of his firm. He didn't disclose the extent to which he had very large, concentrated risky positions in the stocks. I get what his lying to the bank was about, but why is it illegal to buy a lot of stock to buy it at different times of the day, when what's illegal about that? It's a very high standard to meet you, and I

think you've really hit the nail on the head. The standard for market manipulation, which was discussed in the criminal context about thirty years ago in a case of the Second Circuit decided called the Moharan case, basically says the sole purpose of the stock purchases has to be manipulation, that you are buying the stock prices solely to artificially inflaged the stock price, and it's really a question of intent.

Low is the intent of archegos Hung and the other participants in the scheme was the sole intent to artificially inflayed the stock price, and I think that's a very tough standard to meet, although I think it's very fact specific and for the key thing the government has going for it maybe the sheer size of the transaction and what may be a complete lack of any connection to any economic fundamentals or you know, analysis that the stock

was under priced and so further investment was warranted. But it is going to be a challenging legal theory to win that trial, and also who knows what the Second Circuit will do if the case goes up on appeal. On the other hand, this is an area of law that has not been developed all that much, and sometimes court will adjust the law to some extent based upon a particularly egregious set of fact, and so I would

not rule out the viability of this legal theory. Tell us how the law on the Second Circuit might be hell helpful to the defense here, I think. I think the Moharon case me is the case that the defense will most likely site, and in that case, the Second Circuit implied that the standard for the manipulation was that it has to be the sole purpose of the stock crisis, that the manipulation has to be the only reason you're

making these purchases. And I imagine the defense will argue that, you know, they bought the stock because they believed there was undervalue, they believed that the stock was worth more, and that they were aggressively entering into this position because they thought that this would be a good investment, and that they weren't artificially, you know, just trying to increase

the price for some arbitrary reason. Another piece of language in that decision that I think will be helpful to the defense is that if you lose money on a manipulative game, that that can be a fact that weighs against the finding of manipulation, and that could be something that of defendants would argue would cut against the idea that this was a successful manipulation. You said earlier that

this was almost unimaginable to you. Explain why. I just want to highlight this is a really remarkable Hey, Typically when we think of security fraud, we think about a corporation issuing false statement to inflate the stock price. You know, think about Enron twenty years ago issuing false financial statements.

But now you have investors with family offices that are so large and are able to get so much of financing through these derivatives, these total return slops where they're essentially not even buying the stock, but they're entering into a contract with the bank where the bank pays the investor if the stock price goes up, the investor pays

the bank if the stock price goes down. And you know, to see a public company stock price manipulated by a large investor like this is really really remarkable in the

history of securities fraud and securities fraud regulation. Also very interesting comparison with the game Stop situation about a year ago, where you have a whole bunch of small retail investors banding together inflating the stock price of game Stop, and a MC coordinating through chat boards, and this is a little bit more of an elite form of that sort of market activity. And I think that it's very interesting to be that even public company stocks can be manipulated

in this way. The conventional understanding before was that, you know, with a big public company stock, there's just too many shares out there for anyone to effectively manipulate the stock prices of those companies. But this shows that that's no longer the case, and I think that the SDC will have to do some thinking about how we can sat prevent these sorts of shots to the system from happening in the future. Now, on the other hand, there is the language Mohar that may be somewhat useful to the

government's case. And you know, the full purpose standard was used in deciding that case, but there is some language in the second circuit indicating that it's not clear that that is the standard for determining whether there's manipulation um, and so we'll have to see how that law is interpreted by the judges in this case. The collapse put a spotlight on large family offices. What do you think should be done about large family offices? Should they be

held to different standards than they are now. I think some level of disclosure would be prudent for family offices over a certain size. And I think the assumption behind the current framework which exempts family offices from a disclosure to the SEC is the assumption that they're not going to be able to impact market stability. They're not a

systemic risk to the market. But this shows that they can be large enough so that they can have such an impact and the SEC has been moved being in the direction of requiring disclosure of investment companies investment advisors in order to monitor better their potential impact on markets, and to the extent that hedge funds and private equity funds are going to be required to disclose information about their losses to the SEC so that the SEC can

evaluate market risk. I don't see any reason why family offices of a certain size should be exempt from those requirements. The U. S. Attorney's Office is now gathering evidence around whether or not thanks engaged in illegal activities here, particularly whether some market participants were getting tipped off ahead of time. Would that also be a really difficult case to prove. I think if they find the evidence, and you know, I think the question to some extent is to what

extent will some of these defendants agree to cooperate. That is something that could come into the a Asian And you know, I think they'll have access to their records, their documents, so they'll be able to look at various communications. But I would suspect to the accept their worth such agreement. They may not be memorialized. I think that some of these participants are becoming more savvy about the potential for

government regulations, So I think it will be difficult. But if they find the evidence, you think that very clearly would be illegal, and certainly this could result in more cases. You said earlier that this was almost unimaginable to you. Explain why. I just want to highlight this is a really remarkable Hey. Typically when we think of security fraud, we think about a corporation issuing false statements to inflate the stock price. You know, think about Enron twenty years

ago issuing false financial statements. But now you have investors with family offices that are so large and are able to get so much of financing through these drive is these total return slops where they're essentially not even buying the stock, but they're entering into a contract with the bank where the bank pays the investor if the stock price goes up, the investor pays the bank if the

stock price goes down. And you know, to see a public company stock price manipulated by a large investor like this is really really remarkable in the history of securities fraud and securities fraud regulation. Also very interesting comparison with the game Stop situation about a year ago, where you have a whole bunch of small retail investors banning together inflating the stock price of game Stop, and a MC

coordinating through chatboards. And this is a little bit more of an elite form of that sort of market activity. And I think that it's very interesting to see that even public company stocks can be manipulated in this way. The conventional like understanding before was that you know, with a big public company stock, there's just too many airs out there for anyone to effectively manipulate the stock prices

of those companies. But this shows that that's no longer the case, and I think that the SBC will have to do some thinking about how we can best prevent the sources of shocks to the system from happening in the future. Thanks James. That's Professor James Park of u c l A Law School. A divided Supreme Court allowed a selective Northern Virginia public high school to keep using an admissions policy adopted to add more racial and socioeconomic

diversity to its student body. The Justice is refused to block Thomas Jefferson High School's euro policy, which a community group challenged as discriminating against Asian American applicants, but the Fairfax County school Board said it's using race neutral methods to foster diversity, something the Supreme Court had previously indicated

was constitutional. A federal judge had blocked the policy for the current admissions cycle, but a federal appeals court put that ruling on hold by a two to one vote. The case tests what steps schools and universities can take to ensure racial diversity in their classrooms. Joining me is Audrey Anderson, who heads the higher education practice at Bassbarian Sims. The school board says it's using race neutral methods to

foster diversity. Can you describe those methods, Audrey. So the way they are choosing students for this school is completely race neutral. When the applicants are being considered, there is no indication of their name, their gender, or their race on the applications. Everybody is given an application number and that's how they are considered. So then they also take a certain percentage from every middle school that is within the area that this high school covers, but that's all

race neutral as well. So the way they're choosing students is completely race neutral. The reason why um the lower court, the district court here found that that on its face race neutral admissions program violated the Constitution. Was because the court found that, compared to the admissions program they had before, their new admissions program had a disparate impact on Asian

American students. And the court also found that the school boards whole process was the word he used, was infected with racial balancing, which the district court found is unconstitutional. So we said, even though it is the race neutral on its face, the school board had an unlawful intent to harm a particular racial group and their plan indeed has a disparate impact on Asian Americans if it's race

neutral on its face. Due courts usually dig into the intent or this is expected intent, Well, they they do the on its face, the law the district court applied is the appropriate law, and the school board doesn't argue with the legal tests. What the school board argues with is that the district court got the facts wrong, um, And they said that when you look at the facts, uh, there was no intent to harm any particular racial group.

What the school board says they were trying to do, and they say, all the findings that you can make is that the school board was trying to gain a more diverse student body in the school, measured by geography, measured by English language learner status, measured by socio economic background, and measured by race. And so there there are um statements in the record that show that the school board was paying attention to race and how they could get

greater racial diversity. But they say that's not the same thing as saying that the school board had an intent to harm any particular racial group or to have an adverse impact on any particular racial group. The group challenging this, what is it they want? Do they want the school just to admit students based on their tests, on their g p A. How do they want the school to admit students? Well, they don't want the They don't want

the admissions program that the school board enacted. How exactly they want it changed is not clear from the court record that I have seen. I don't know if they are asking to go back to the process exactly how

it was before. I think that from the papers, what they're saying is they want the school board to come up with some other process that is constitutional, and to do that in the matter of weeks and make the new choices in a way that does not harm um Asian Americans to the same extent, or that actually does not harm them at all. The Supreme Court turned this away. It was on what's called the shadow docket, an emergency request.

Did it say anything about the issue itself or could it just have turned it away because they'd argued that it was you know, it was too late to make changes, right. So what happened after the district court found that the plan was unconstitutional and the district court actually enjoined the school board from using that admissions plan, then the school board went to the Court of Appeals and the Court of Appeals said, you know, hey, it's going to be way too hard for the school board to put a

new plan in place in this amount of time. But the judges on the Court of Appeals for the Fourth Circuit also said, you know, we think that the district court might have gotten this wrong. Disrecourt shouldn't have given summary judgment. There are there are disputed facts here, um, and they may have cut The distrec Court might have come to the wrong factual conclusions as to disparate impact and the school board it's intent. So we're going to

um put a stay on the injunction. So then it went to the Supreme Court and the student group is now saying, please vacate the stay, so we have an injunction again so the old so that the new plan

won't go into effect. So on the one hand, it doesn't say anything at all, because there is a very high standard, at least on paper, for the Supreme Court to reach down and and say, you know, we are going to um with no real briefing, with no real argument, We're going to undo what the Court of Appeals has done.

It's a very high standard. One of the things that some lawyers are complaining about or raising some concerns about, is that over the last you know, two or three years or maybe five years, the court seems to have in practice loosen that standard, even though on paper it's the same. So on the one hand, you say, there's nothing to be learned about here. They didn't meet the very high standard. But the thing that is a little more concerning is that there were three justices who dissented

from that decision. There's nothing written, so there's no opinion written, but Justice Thomas, Justice Alito, and Justice Corsus would have granted the application to vacate the stay, which means that from their perspective, they think that the Court would take this case to review it, that there is irreparable harm being visited on these Asian American students by the new plan, and that there's a likelihood success for the Asian American students.

So they've already got three votes um at the Supreme Court. If they can get the case there or likely do, the Supreme Court would say, well, this is you know, a preliminary vote on something like this doesn't tell you exactly how will vote at the end of the day, but it usually does, so that's the most eesting thing. They've got three votes now if they were to make it to the Supreme Court. But isn't it surprising that

they don't have the Chief Justice? No, I don't think it's surprising at all, June that they don't have the Chief Justice on this, because the Chief has been more likely to stick to the court real test of we are not going to give emergency relief on a case unless they meet this very high standard. And having to make the school district change their admissions policy in such a very short period of time, I think is something

that would usually, you know, weigh against doing that. In a situation like this, So that's not a huge surprise. We've talked before about the what's coming next term at the Supreme Court, this showdown over affirmative action, if you will, in cases involving Harvard College and the University of North Carolina. Is this different because those programs explicitly take account of race as one factor among many, where as this high

school program uses race neutral criteria. So is it different, Yes, Junior, right, it's different because of that. And the Supreme Court, though, has already dated out that things are different at K

twelve schools rather than at schools of higher education. So whereas the Court has clearly held in the precedent that's being challenged this coming term that colleges and universities do have a compelling interest in a diverse student enrollments and that they may use race conscious measures to forward those means as long as they're narrowly tailored, there's not really a holding from the Supreme Court for K twelve institutions

the same way. And that's from a case from two thousand and six called Parents Involved in Community Schools versus Seattle, And that's that's the case that the lawyers who are representing the plainists in this Thomas Jefferson High School case. Specific Legal Foundation, the Pacific Legal Foundation is very interested in efforts to create more racially diverse student enrollments in K twelve schools, so they are on the lookout for cases that they can support to further their efforts in

what they believe are improper uses of race. Even when the school boards say this is race neutral, we're not using race at all, as in this case, the Specific Legal Foundation will sometimes say, oh, but these other things

you're doing our our pretext for using race. And in fact, when the parents involved in the Community Schools case was argued on the Pacific Legal Foundation and other amiki, we're trying to push the court to not only say that school boards can't use race conscious measures, they were also trying to get the court to go so far as to say that any time that a school to strict talks about the racial components of their school, talks about trying to take any race neutral steps to create a

greater diversity in a school, that that was unconstitutional because the Constitution is supposed to be color blind, and so governmental actors should not be talking about race at all. So I see that this is kind of a step towards them maybe trying to cement that idea as law. Thanks for your insights, Audrey. That's Audrey Anderson, who heads the higher education practice at Basparian SIMS. I'm June Grosso and you're listening to Bloomberg.