It’s a move that’s almost unthinkable even for Wall Street’s most maverick investors, for fear of landing in regulatory crosshairs.

But buried in the billions Bill Hwang wagered and lost, the man behind Archegos Capital Management used derivatives to secretly build a more-than 20 per cent stake in a U.S. regional bank, right under the noses of financial watchdogs, according to people with knowledge of the situation. That sent the stock on a wild surge, and when Archegos collapsed, a dramatic plunge.

What’s more, Archegos and the bank had private conversations about a significant investment that wasn’t revealed to other shareholders, said the people, asking not to be identified because they weren’t authorized to speak publicly. As the stock soared, executives at the Dallas-based lender raised record new capital from unwitting investors.

The events at Texas Capital Bancshares Inc. offer a rare look at what happens when a risk-taking investing whale such as Hwang dives into a stock -- let alone one belonging to a highly regulated bank. Authorities have long discouraged outsiders from potentially influencing institutions that gather deposits, even thwarting the likes of Warren Buffett from beefing up some of his favorite bank bets. But their concerns also extend to the danger a big shareholder could quickly retreat, sending a lender’s stock into a tailspin, and rattling counterparties and customers.

The extent of Archegos’s involvement with the Texas bank adds another dimension to a saga that’s already prompted probes and reviews around the world. Watchdogs including the U.S. Securities and Exchange Commission have said they’re examining whether the rules themselves need to be rewritten to close any loopholes and eliminate gray areas to ensure investors like Archegos disclose outsize wagers.

“It goes against the intent of what the regulations and laws were set up for,” said Bill Dudley, the former New York Federal Reserve President. “If people go around and circumvent those laws and regulations, then you have a problem, and you’ve got to do something about it.”

Archegos’s enablers -- the prime brokers who effectively helped Hwang gamble away his fortune -- showed up in filings as owners of more than a quarter of the outstanding shares by the end of 2020. They included Credit Suisse Group AG, where executives grew uneasy after discovering their firm alone owned 9 per cent of a regional U.S. bank, and Morgan Stanley, which in the midst of the stock’s surge helped Texas Capital raise more money.

The question of whether Texas Capital should have disclosed Archegos’s role in driving up the stock price comes down to how much the bank knew and whether it was material information. In the months since the episode, no regulator has publicly accused the lender of wrongdoing.

The wave of purchases sent the battered stock soaring 93 per cent in last year’s second half, making the company the top performer in the S&P Midcap Financials Index tracking 63 lenders. This year -- since Archegos imploded -- it’s among the worst.

“It’s one thing for Archegos to have big stakes in commercial companies, but with a depository institution, the risks are much greater,” said Jeremy Kress, a former banking policy attorney at the Fed. “If a big holder sells it could trigger a run.”

The descriptions of Archegos’s wagers on Texas Capital, the firms’ communications and Credit Suisse’s internal deliberations are based on interviews with five people close to those companies.

Spokespeople for Archegos, Texas Capital, Credit Suisse and Morgan Stanley declined to comment. Regulators haven’t brought claims against any of them, and no signs have emerged of a probe targeting Texas Capital.


Texas Capital was born in 1998, founded by Jody Grant, who'd just finished a high-profile stint as finance chief of Electronic Data Systems through its spinoff from General Motors Corp. The aim was to build a regional powerhouse that could bankroll an economy bigger than the likes of Canada, Russia and Australia.

By the mid-2000s, Grant helped one of the lender’s investment bankers at Bear Stearns, Brian Jones, start a private equity firm with backing from Texas Capital. Jones kept that firm, BankCap Partners, going when he later joined Archegos and became its head of research. Hwang invested in a BankCap fund that’s still in operation. 

Jones encouraged Hwang to take a look at Texas Capital and connected him with its management, according to the people close to the situation. The shares had been beaten down over the years by misadventures in energy lending, management missteps and what the bank called a “bruised” brand. As the COVID-19 pandemic set in, the stock tumbled to its lowest in a decade. Hwang decided it was time to go big.

His family office had honed a strategy for placing outsize bets on stocks without drawing attention to itself. Prime brokers would typically buy up a company’s shares and, using a swap agreement, let Hwang reap the gains or losses as the price moved. In a number of cases, his firm placed parallel bets with a roster of prime brokers. In regulatory disclosures, those middlemen -- not Archegos -- were listed as the stock’s owners. 

In late 2020, Texas Capital’s stock soared as Archegos built a position that would peak somewhere above 20 per cent of the shares, two people familiar with the matter said. In addition to using swaps, Archegos also bought some stock directly. But because that portion of the wager was shy of a 5 per cent stake, the family office concluded that it didn’t need to disclose it. 

Inside Archegos, some staff members voiced concerns about whether regulators would be upset if they learned about the bank’s total position. Hwang and his team brushed off those worries, the people said, assuring staff that lawyers had vetted the strategy of using swaps and that it was OK. The contracts gave Archegos the economic effect of holding the stock, but not direct ownership.

Archegos told Texas Capital’s management that it was building a stake in the bank both directly and through swaps, though it’s unclear whether the amount was specified, the people said. The spokesperson for Texas Capital declined to comment on whether the bank knew the full extent of Archegos’s wager or sought to find out.


“Everyone knew about the positions of Archegos” and its status as a large shareholder, said Grant, the Texas Capital founder, who said he spoke with executives at both firms. Still, he said he was led to believe that the stake was less than 10 per cent.

Grant who stepped down as CEO more than a decade ago, said he remains close with management and holds the bank’s stock. He emphasized that talks with Hwang’s family office were friendly and that it expressed support for the bank’s current managers. “They didn’t attempt to assert influence.”

Swaps and friendly discussions wouldn’t do much to assuage regulators’ concerns, Dudley said.

“There’s potential for abuse,” the former banking regulator said. “The Fed doesn’t want to adjudicate whether the person who has acquired the stake is friendly or not friendly, or could turn unfriendly tomorrow.”

While Archegos’s wagers sent the stock price on a tear, Texas Capital didn’t publicly address the family office’s role and why a slate of prime brokers was suddenly appearing on the list of its largest holders. Some analysts and investors attempted to explain the mysterious move by pointing to the appointment of JPMorgan Chase & Co. banker Rob Holmes as Texas Capital’s new chief in January -- the third man to lead the bank in under two years.

Then in February, the Dallas lender sought to bolster its capital, tapping Morgan Stanley -- also listed among its biggest holders -- to help raise US$300 million, largely from retail investors. The preferred-share fundraising was the biggest in the history of the regional bank.

Just before that deal closed, the SEC published fresh guidance to companies looking to raise money in the wake of recent stock jumps, underscoring that executives should flag any risks to investors.

“In general, a public company raising capital is under an affirmative obligation to disclose risk factors,” said Joshua Mitts, an associate professor at Columbia Law School. If management knows there is one large investor whose buying spree is temporarily inflating the stock price, and doesn’t disclose it, then that could spell trouble, he said.


In the weeks after Texas Capital’s fundraising the company’s market value briefly touched US$4.5 billion. Then Archegos ran into serious problems.

Another company in its portfolio, ViacomCBS Inc., decided to use its elevated stock price to sell more shares, also tapping Morgan Stanley to lead the deal. The announcement of the secondary offering sent the stock down 9 per cent the next day, taking a bite out of Archegos’s highly leveraged portfolio and leading to an avalanche of margin calls. Prime brokerages soon began racing to sell off a basket of holdings that, at their peak, had exceeded US$100 billion.

On the weekend of Archegos’s collapse in March, an executive at Credit Suisse reviewed the Texas Capital positions and later expressed concerns to colleagues that the size of the holdings might have run afoul of U.S. rules, according to a person with knowledge of the conversations. Yet there was also a measure of relief among Credit Suisse executives: At least they hadn’t been tapped to help raise capital, the person said.

In the six months after Archegos’s implosion, the SEC announced it’s working on a series of measures to force hedge funds, family offices and other money managers to reveal more information about their swaps dealings -- potentially even giving the public access to aggregate data on such bets.

Over that time, Texas Capital’s shares plunged by well over a third.

But the bet on Texas Capital was smart, Grant suggested.

“Had Archegos not imploded,” he said, “they would have made a ton of money on it.”