(Bloomberg) -- When Archegos Capital Management approached Bank of Montreal about becoming a trading counterparty in 2020, the Canadian bank at first said no.

One big reason was “concerns over the prior issues with Tiger Asia,” Joseph Boccuzzi, a Bank of Montreal risk manager, testified Wednesday at the fraud and market manipulation trial of Archegos founder Bill Hwang.

Tiger Asia Management was the hedge fund Hwang ran for more than a decade before founding Archegos in 2013, its name proudly reflecting his status as one of Julian Robertson’s so-called Tiger Cubs. 

But Hwang’s lawyers have been trying to keep the Archegos jury from hearing much about Tiger Asia because the fund pleaded guilty to an insider trading-related charge in 2012. Hwang settled for $60 million without admitting wrongdoing but launched Archegos as a family office in part because he’d agreed not to take outside money.

The defense has argued that Tiger Asia’s legal problems could prejudice jurors as they consider the Archegos charges. US District Judge Alvin Hellerstein recognized that potential Wednesday when he said prosecutors could introduce a document discussing Bank of Montreal’s Tiger Asia concerns, but only with the terms “insider trading” and “market manipulation” redacted.

Inner Circle

Tiger Asia has come up before at the Archegos trial, in part because most of Hwang’s inner circle first joined him there. His co-defendant, former Archegos chief financial officer Patrick Halligan, was at Tiger Asia. So were former risk head Scott Becker and former head trader William Tomita. 

Becker and Tomita are now the prosecution’s star cooperating witnesses, and Becker testified last week that he was directed to lie about Archegos’ portfolio to its counterparties. Wall Street banks ultimately lost $10 billion when the family office collapsed in March 2021. Bank of Montreal’s $5.5 million in losses were relatively tiny within that group.

Boccuzzi isn’t the only bank witness to have said his employer had Tiger Asia concerns. The first witness called in the case, former UBS Group AG risk manager Bryan Fairbanks, testified that he expected Archegos would have trouble becoming a trading client of the Swiss bank because of Hwang’s past. But Boccuzzi went into greater detail on his bank’s discussion of Tiger Asia.

In the document, Boccuzzi evaluated Archegos’ risk profile, writing in November 2020 about the “potential reputational risk” of working with Archegos. He said Bank of Montreal decided to subject Archegos to an enhanced review process similar to that previously enacted for Steven A. Cohen’s Point72. 

Cohen’s former firm, SAC Capital Advisors, pleaded guilty in an insider trading probe and agreed to pay $1.8 billion to resolve cases against it. Cohen himself wasn’t charged, but he was barred for two years from trading outside money. Boccuzzi didn’t say whether Point72 became a Bank of Montreal client.

Apart from Tiger Asia’s past, Bank of Montreal was also worried that Archegos had a focus on Chinese technology companies.

Chinese ADRs

Boccuzzi ultimately recommended taking on Archegos as a client but gave the firm an S3 internal credit rating, “among our lowest,” and suggested trading limits to address potential risks, he testified. The bank initially rejected Archegos despite Boccuzzi’s recommendations, but later reversed itself in early 2021. 

On the stand, Boccuzzi began to explain what his manager told him about that decision, but the defense successfully objected to that as hearsay testimony.

Boccuzzi said Becker reassured him that Archegos was mainly invested in highly liquid, big-name US technology stocks like Apple Inc. and Amazon.com Inc. This reassured Bank of Montreal, Boccuzzi testified. 

“The majors are more stable so it’s less likely the prices of those securities will fluctuate,” he said.

Becker testified last week that he lied when he told several banks that Archegos was heavily invested in so-called FAANG stocks. In reality, American depositary receipts for Chinese companies like Baidu Inc., Tencent Holdings and GSX Techedu Inc. made up a large part of its portfolio. A downturn in those holdings in the last week of March contributed to Archegos’ implosion.

Capacity Limits

According to Becker’s testimony, Archegos reached out to Bank of Montreal as well as Goldman Sachs Group Inc. in late 2020 because it was reaching its trading capacity limits at other banks and was looking to add new counterparties. Boccuzzi said Wednesday that he pressed Becker on whether that was the case. 

“One thing I wanted to know was if they didn’t have capacity at other lenders and that’s why they came to us,” Boccuzzi testified. “Maybe there was something they were worried about that I should be worried about as a lender.”

Becker replied that Archegos “just wanted to have a wide variety” of trading partners, Boccuzzi said.

Archegos placed its first swap order with Bank of Montreal in early 2021. Boccuzzi said he grew suspicious when the firm submitted a March 2021 net asset value report showing “exceptional performance.” 

“The NAV of the fund had climbed quite a bit, almost an unprecedented amount in my experience,” Boccuzzi said. “I was trying to figure out what they were doing.”

That would become clear later that month after Archegos missed the bank’s margin call.

The case is US v. Hwang, 22-cr-00240, US District Court, Southern District of New York (Manhattan).

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