In the Manhattan federal trial of Archegos Capital Management founder Bill Hwang, which is in its seventh week, the most damning testimony against the formerly high-flying protégé of Tiger Management’s Julian Robertson has centered around one of the most obscure stocks he allegedly manipulated before his firm imploded three years ago.
That stock is GSX Techedu, an online Chinese education company that had several high-profile short-sellers on the other side of the trade. Hwang called the short-sellers — which included Muddy Waters Research’s Carson Block and Citron Research’s Andrew Left — “bad actors,” according to the testimony of Archegos former head trader William Tomita, the government’s star witness who testified for four days about the trading he said Hwang directed him to do.
Left launched his GSX short in April 2020 with a detailed report concluding that most of the company’s users were fake. The stock fell precipitously but quickly recovered. Then in May, Block came out with his GSX short thesis, claiming more of the same. But each time the stock fell on the short-seller’s allegations, it quickly rallied.
Block previously told Institutional Investor that in the summer of 2020 he had learned from two insiders in the U.S.-China investment world that some Tiger Cubs — including Hwang— were behind the run-up in the shares, which he called an orchestrated short squeeze in a company that “everyone knows is a fraud.”
The short was a painful one. “Trying to stay in the GSX position was like trading in the matrix, and every single move we made was the wrong move,” recalled Block in an interview this week. He said he is no longer emotional about the losses he incurred, but that following the trial is “an intellectually interesting experience for me to learn how they did this.”
Manhattan federal prosecutors have charged Hwang with market manipulation, racketeering conspiracy, and fraud through his Archegos family office, which collapsed in March 2021 as his stock trading scheme unraveled amid margin calls by his prime brokers.
“I think Hwang should go to prison,” said Block. “I’ll experience a measure of schadenfreude if he does. But aside from that, it’s not really that big a deal anymore.”
By the end of July 2020, Hwang had more than $1 billion in exposure to GSX, according to the government. At that time, the stock was near $100 per share, after having fallen below $30 on the Muddy Waters report in May. GSX went on to trade as high as $141 per share in August, and additional purchases by Hwang continued to prop it up. The stock — which changed its name to Gaotu Techedu after the Archegos implosion — now trades at about $5.
GSX wasn’t the most famous of Archegos’s stocks, but it was one of the firm’s biggest bets. Hwang controlled some 75 percent of the shares, according to Tomita’s testimony. “The fund had cornered the market,” he said, according to a Bloomberg liveblog of the proceedings.
Whenever the stock sold off, Archegos was in danger of being forced to pay its banks more money to hold on to its positions and allegedly would swoop in to buy more shares. As some point, those moves were necessary to save the firm from collapse, the government says.
As Tomita told the jury, when GSX sold off in October 2020, he spent $749 million in one day to prop up the stock against the short-sellers. Hwang called the effort a “Herculean defense” that became a model for manipulative trading in other stocks, Tomita testified.
Such details could be critical to the government. Stock manipulation cases are notoriously difficult to prove. But though it might be easy to argue that buying up shares of well-known companies like ViacomCBS or Discovery (two big Archegos positions) was done because the companies were undervalued, that case is harder to make with a stock that was being called a fraud and was under investigation by U.S. regulators.
Archegos’s position in stocks like GSX was orchestrated through swaps placed with the banks, which bought the stocks in their own names. Because those swaps don’t have to be disclosed to the public, Archegos’s position was unknown and the largest holders of record were the swap counterparties — which bought the stock to cover their exposure to Hwang’s swaps bets. Archegos would save most of its activity for the end of the trading day, hoping to lessen its losses in GSX and avoid paying more money to the banks placing trades for Archegos, Tomita said. Hwang also told him to find “more capacity” to trade GSX to prop it up, which Tomita said forced him to reach out to other big banks to place its trades.
Archegos allegedly misled the banks about its positions, which were spread around the Street. By the time the firm collapsed, the banks — including Goldman Sachs, Morgan Stanley, Credit Suisse, and Nomura — had lost $10 billion on those bets.
The evidence looks bad for Hwang, said Block. First off, Hwang owned about 75 percent of GSX’s float, which was hidden, Block pointed out. “And there was clearly an imperative to move the stock price of GSX upward in the face of statements and publications by short-sellers.” Hwang “probably understood that it was a fraud. It’s not like he could have a real long-term thesis on it.”
Moreover, according to Tomita’s testimony, Hwang was “directing his traders to trade in ways that are designed to achieve certain price outcomes — defend the stock, support the stock, push the stock up,” Block explained. “At some point, his business crossed this Rubicon where it’s no longer about making money, but it’s about being able to avoid the house of cards caving in on him.”
Such details make the manipulation charge easier to make, he argued.
District Court Judge Alvin Hellerstein has said that the trial could continue into the week of the July 4th holiday.
Barry Berke, Hwang’s lawyer, declined to comment.
