Jefferies risk manager remembers red flags in Archegos trial

A Jefferies Financial Group risk manager wondered why her contact at Archegos seemed to be in such a rush to withdraw hundreds of millions of dollars in excess cash from its trading account. 

“What’s the emergency? Why?” she remembered thinking.

“I wanted to understand and there seemed to be an urgency about the call,” Jennifer Miranda, a Jefferies managing director, testified about a March 24, 2021 call with Scott Becker, then the head of risk management at Archegos Capital Management. 

What Miranda didn’t know was that Archegos was in the middle of a furious campaign of trading and moving cash around to try to meet a spate of margin calls just two days before it would implode. The spectacular failure, taking place in less than a week, caused $10 billion in losses to its counterparty banks, including Jefferies, Morgan Stanley and Nomura Holdings Inc. while contributing to the downfall of Credit Suisse Group AG. 

Miranda took the stand Thursday in the criminal racketeering conspiracy and fraud trial of Bill Hwang, the founder of Archegos.

Miranda told jurors she’s worked at Jefferies for more than 10 years, managing risk and advising the bank on working with hedge funds, family offices and private equity firms that trade derivatives. 

'INDEPENDENT OPINION'

“My role is to protect the firm and give an independent opinion on credit,” she said. 

Prosecutors claim Hwang and Patrick Halligan, the former chief financial officer of Archegos who’s also on trial in Manhattan federal court, led a scheme to manipulate share prices and defrauded counterparties by lying about the firm’s finances and portfolio.

Becker has pleaded guilty in the case and is cooperating with the government in hopes of avoiding prison. He’s set to testify as soon as Monday morning.

In the March 24 call, Miranda said she asked Becker whether Archegos was having money problems. The firm wanted to withdraw a large amount of cash that had built up in the account in recent months. On the stand, Miranda couldn’t remember the exact amount of the request, but said she thought it was more than $415 million. 

$7 BILLION

In a call the previous week, Miranda said Becker told her that Archegos was holding about $7 billion in unencumbered cash at the time. He said the firm could unwind half of its book in 10 days, 75% in 20 days and the entire amount in a month.

Becker reassured Miranda that “they were not in distress and they had no liquidity issues.” Based on the phone call, Jefferies partly approved Archegos’ request, letting the family office withdraw $240 million, Miranda said.

Miranda said she later learned that Archegos was in default with another bank. Jefferies was later forced to liquidate its Archegos positions, resulting in a loss of $40 million, she testified.

Under cross-examination, Miranda acknowledged that, under its contract with Jefferies, Archegos was entitled to withdraw the excess cash. She agreed that Archegos had never missed a Jefferies margin call in the past.

Miranda’s testimony about her call with Becker echoes the testimony of former UBS risk manager Bryan Fairbanks earlier this week. Fairbanks recalled that Archegos told UBS it had 30% to 40% of its equity in free cash, and said UBS approved an increase in exposure from $8 billion to $10 billion because Archegos claimed to be able to liquidate its investments in a matter of days.

'SOME COMFORT'

“It gave us some comfort,” Fairbanks testified.

Jurors are likely to hear from more representatives of the 11 counterparty banks that facilitated Archegos trades in the total return swaps that, prosecutors claim, Archegos used to obscure their financial risk while continuing to receive the credit necessary to keep making its high-margin, high-risk trades.

The trial is being overseen by US District Judge Alvin Hellerstein, 90, who has been unusually active in questioning witnesses and directing prosecution and defense lawyers to move on from questions he considers unproductive. 

“It’s a long trial,” Hellerstein told a prosecutor. “We’ve gotta move this! Let’s not make everything so laborious!”

At one point the judge interjected a question of his own to Miranda, then after hearing the answer, ordered his own question and the response stricken from the record.

Miranda’s testimony followed that of a former top Archegos executive, co-president Brian Jones, about his experience on the same day as Miranda’s call with Becker. Jones told jurors he was “on spring break in Texas” when executive chairman Andy Mills informed him that evening that the firm was in dire trouble, that he was working on a liquidation strategy and praying the markets went up the next day.

“Otherwise, liquidation might be dire,” Mills wrote in an email.

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