Speaker 1: This is Bloombird Law with June Brussel from Bloombird Radio.
Speaker 1: The sudden collapse of Arkaegos Capital Management last year sent
Speaker 1: shockwaves through global finance, exposed gaping holes and how major
Speaker 1: banks managed their risks, and how regulators oversea Wall Street,
Speaker 1: Manhattan US attorney Damien Williams says it was a massive
Speaker 1: fraud of vast criminal scheme to mislead banks and manipulate
Speaker 1: the markets that nearly jeopardized our financial system. The lies
Speaker 1: fed the inflation, and the inflation fed more lies. Round
Speaker 1: and round it went. The last year, the music stopped,
Speaker 1: the bubble burst, the prices dropped, and when they did,
Speaker 1: billions of dollars nearly evaporated overnight. Arkaegos founder James Wong
Speaker 1: and its chief financial officer, Patrick Halligan were arrested on
Speaker 1: Wednesday on securities fraud, racketeering and market manipulation charges. Joining
Speaker 1: me is James Park, a professor at u c l
Speaker 1: A Law School. This is being called one of the
Speaker 1: highest profile white color prosecutions in recent memory. Do you agree?
Speaker 1: I agree, simply because of the size of the alleged
Speaker 1: market manipulation, something that I think the extent of which,
Speaker 1: in my mind, seemed unimaginable until it actually happened. And
Speaker 1: it's also a very ambitious case. In my view, market
Speaker 1: manipulation is very difficult to identify and define, and so
Speaker 1: the case in my view, is forging ahead in new
Speaker 1: areas and could not only affect the individual defendants in
Speaker 1: the case, but it could also create lawed expectations for
Speaker 1: the way that creating happens on Wall Street. The U
Speaker 1: S attorney said the scheme was his oric in scope.
Speaker 1: Can you explain what the scheme was? The theory was
Speaker 1: that he was manipulating the prices of stock that he
Speaker 1: was invested in very simply by buying huge amounts of
Speaker 1: stock using his own funds and also critically borrowed money,
Speaker 1: money that was borrowed from various investment banks, and simply
Speaker 1: by buying and buying. He was trying to drive the
Speaker 1: price up. He was buying at certain times the end
Speaker 1: of the trading day, when those trades would have a
Speaker 1: larger impact. They were engaging in transactions before the market opened,
Speaker 1: when there's not a high volume of transactions, and so
Speaker 1: in some ways, the basic scheme is actually fairly simple.
Speaker 1: It's simply supply and demand. You know, the more you
Speaker 1: demand of a particular thing, the higher the price goes,
Speaker 1: and the alleged intent was to increase the price of
Speaker 1: his holding. A second element of the team was that
Speaker 1: in order to get the funds from the investment banks,
Speaker 1: he lied about the condition of his firm. He didn't
Speaker 1: disclose the extent to which he had very large, concentrated
Speaker 1: risky positions in the stocks. I get what his lying
Speaker 1: to the bank was about, but why is it illegal
Speaker 1: to buy a lot of stock to buy it at
Speaker 1: different times of the day, when what's illegal about that?
Speaker 1: It's a very high standard to meet you, and I
Speaker 1: think you've really hit the nail on the head. The
Speaker 1: standard for market manipulation, which was discussed in the criminal
Speaker 1: context about thirty years ago in a case of the
Speaker 1: Second Circuit decided called the Moharan case, basically says the
Speaker 1: sole purpose of the stock purchases has to be manipulation,
Speaker 1: that you are buying the stock prices solely to artificially
Speaker 1: inflaged the stock price, and it's really a question of intent.
Speaker 1: Low is the intent of archegos Hung and the other
Speaker 1: participants in the scheme was the sole intent to artificially
Speaker 1: inflayed the stock price, and I think that's a very
Speaker 1: tough standard to meet, although I think it's very fact
Speaker 1: specific and for the key thing the government has going
Speaker 1: for it maybe the sheer size of the transaction and
Speaker 1: what may be a complete lack of any connection to
Speaker 1: any economic fundamentals or you know, analysis that the stock
Speaker 1: was under priced and so further investment was warranted. But
Speaker 1: it is going to be a challenging legal theory to
Speaker 1: win that trial, and also who knows what the Second
Speaker 1: Circuit will do if the case goes up on appeal.
Speaker 1: On the other hand, this is an area of law
Speaker 1: that has not been developed all that much, and sometimes
Speaker 1: court will adjust the law to some extent based upon
Speaker 1: a particularly egregious set of fact, and so I would
Speaker 1: not rule out the viability of this legal theory. Tell
Speaker 1: us how the law on the Second Circuit might be
Speaker 1: hell helpful to the defense here, I think. I think
Speaker 1: the Moharon case me is the case that the defense
Speaker 1: will most likely site, and in that case, the Second
Speaker 1: Circuit implied that the standard for the manipulation was that
Speaker 1: it has to be the sole purpose of the stock crisis,
Speaker 1: that the manipulation has to be the only reason you're
Speaker 1: making these purchases. And I imagine the defense will argue that,
Speaker 1: you know, they bought the stock because they believed there
Speaker 1: was undervalue, they believed that the stock was worth more,
Speaker 1: and that they were aggressively entering into this position because
Speaker 1: they thought that this would be a good investment, and
Speaker 1: that they weren't artificially, you know, just trying to increase
Speaker 1: the price for some arbitrary reason. Another piece of language
Speaker 1: in that decision that I think will be helpful to
Speaker 1: the defense is that if you lose money on a
Speaker 1: manipulative game, that that can be a fact that weighs
Speaker 1: against the finding of manipulation, and that could be something
Speaker 1: that of defendants would argue would cut against the idea
Speaker 1: that this was a successful manipulation. You said earlier that
Speaker 1: this was almost unimaginable to you. Explain why. I just
Speaker 1: want to highlight this is a really remarkable Hey, Typically
Speaker 1: when we think of security fraud, we think about a
Speaker 1: corporation issuing false statement to inflate the stock price. You know,
Speaker 1: think about Enron twenty years ago issuing false financial statements.
Speaker 1: But now you have investors with family offices that are
Speaker 1: so large and are able to get so much of
Speaker 1: financing through these derivatives, these total return slops where they're
Speaker 1: essentially not even buying the stock, but they're entering into
Speaker 1: a contract with the bank where the bank pays the
Speaker 1: investor if the stock price goes up, the investor pays
Speaker 1: the bank if the stock price goes down. And you know,
Speaker 1: to see a public company stock price manipulated by a
Speaker 1: large investor like this is really really remarkable in the
Speaker 1: history of securities fraud and securities fraud regulation. Also very
Speaker 1: interesting comparison with the game Stop situation about a year ago,
Speaker 1: where you have a whole bunch of small retail investors
Speaker 1: banding together inflating the stock price of game Stop, and
Speaker 1: a MC coordinating through chat boards, and this is a
Speaker 1: little bit more of an elite form of that sort
Speaker 1: of market activity. And I think that it's very interesting
Speaker 1: to be that even public company stocks can be manipulated
Speaker 1: in this way. The conventional understanding before was that, you know,
Speaker 1: with a big public company stock, there's just too many
Speaker 1: shares out there for anyone to effectively manipulate the stock
Speaker 1: prices of those companies. But this shows that that's no
Speaker 1: longer the case, and I think that the SDC will
Speaker 1: have to do some thinking about how we can sat
Speaker 1: prevent these sorts of shots to the system from happening
Speaker 1: in the future. Now, on the other hand, there is
Speaker 1: the language Mohar that may be somewhat useful to the
Speaker 1: government's case. And you know, the full purpose standard was
Speaker 1: used in deciding that case, but there is some language
Speaker 1: in the second circuit indicating that it's not clear that
Speaker 1: that is the standard for determining whether there's manipulation um,
Speaker 1: and so we'll have to see how that law is
Speaker 1: interpreted by the judges in this case. The collapse put
Speaker 1: a spotlight on large family offices. What do you think
Speaker 1: should be done about large family offices? Should they be
Speaker 1: held to different standards than they are now. I think
Speaker 1: some level of disclosure would be prudent for family offices
Speaker 1: over a certain size. And I think the assumption behind
Speaker 1: the current framework which exempts family offices from a disclosure
Speaker 1: to the SEC is the assumption that they're not going
Speaker 1: to be able to impact market stability. They're not a
Speaker 1: systemic risk to the market. But this shows that they
Speaker 1: can be large enough so that they can have such
Speaker 1: an impact and the SEC has been moved being in
Speaker 1: the direction of requiring disclosure of investment companies investment advisors
Speaker 1: in order to monitor better their potential impact on markets,
Speaker 1: and to the extent that hedge funds and private equity
Speaker 1: funds are going to be required to disclose information about
Speaker 1: their losses to the SEC so that the SEC can
Speaker 1: evaluate market risk. I don't see any reason why family
Speaker 1: offices of a certain size should be exempt from those requirements.
Speaker 1: The U. S. Attorney's Office is now gathering evidence around
Speaker 1: whether or not thanks engaged in illegal activities here, particularly
Speaker 1: whether some market participants were getting tipped off ahead of time.
Speaker 1: Would that also be a really difficult case to prove.
Speaker 1: I think if they find the evidence, and you know,
Speaker 1: I think the question to some extent is to what
Speaker 1: extent will some of these defendants agree to cooperate. That
Speaker 1: is something that could come into the a Asian And
Speaker 1: you know, I think they'll have access to their records,
Speaker 1: their documents, so they'll be able to look at various communications.
Speaker 1: But I would suspect to the accept their worth such agreement.
Speaker 1: They may not be memorialized. I think that some of
Speaker 1: these participants are becoming more savvy about the potential for
Speaker 1: government regulations, So I think it will be difficult. But
Speaker 1: if they find the evidence, you think that very clearly
Speaker 1: would be illegal, and certainly this could result in more cases.
Speaker 1: You said earlier that this was almost unimaginable to you.
Speaker 1: Explain why. I just want to highlight this is a
Speaker 1: really remarkable Hey. Typically when we think of security fraud,
Speaker 1: we think about a corporation issuing false statements to inflate
Speaker 1: the stock price. You know, think about Enron twenty years
Speaker 1: ago issuing false financial statements. But now you have investors
Speaker 1: with family offices that are so large and are able
Speaker 1: to get so much of financing through these drive is
Speaker 1: these total return slops where they're essentially not even buying
Speaker 1: the stock, but they're entering into a contract with the
Speaker 1: bank where the bank pays the investor if the stock
Speaker 1: price goes up, the investor pays the bank if the
Speaker 1: stock price goes down. And you know, to see a
Speaker 1: public company stock price manipulated by a large investor like
Speaker 1: this is really really remarkable in the history of securities
Speaker 1: fraud and securities fraud regulation. Also very interesting comparison with
Speaker 1: the game Stop situation about a year ago, where you
Speaker 1: have a whole bunch of small retail investors banning together
Speaker 1: inflating the stock price of game Stop, and a MC
Speaker 1: coordinating through chatboards. And this is a little bit more
Speaker 1: of an elite form of that sort of market activity.
Speaker 1: And I think that it's very interesting to see that
Speaker 1: even public company stocks can be manipulated in this way.
Speaker 1: The conventional like understanding before was that you know, with
Speaker 1: a big public company stock, there's just too many airs
Speaker 1: out there for anyone to effectively manipulate the stock prices
Speaker 1: of those companies. But this shows that that's no longer
Speaker 1: the case, and I think that the SBC will have
Speaker 1: to do some thinking about how we can best prevent
Speaker 1: the sources of shocks to the system from happening in
Speaker 1: the future. Thanks James. That's Professor James Park of u
Speaker 1: c l A Law School. A divided Supreme Court allowed
Speaker 1: a selective Northern Virginia public high school to keep using
Speaker 1: an admissions policy adopted to add more racial and socioeconomic
Speaker 1: diversity to its student body. The Justice is refused to
Speaker 1: block Thomas Jefferson High School's euro policy, which a community
Speaker 1: group challenged as discriminating against Asian American applicants, but the
Speaker 1: Fairfax County school Board said it's using race neutral methods
Speaker 1: to foster diversity, something the Supreme Court had previously indicated
Speaker 1: was constitutional. A federal judge had blocked the policy for
Speaker 1: the current admissions cycle, but a federal appeals court put
Speaker 1: that ruling on hold by a two to one vote.
Speaker 1: The case tests what steps schools and universities can take
Speaker 1: to ensure racial diversity in their classrooms. Joining me is
Speaker 1: Audrey Anderson, who heads the higher education practice at Bassbarian Sims.
Speaker 1: The school board says it's using race neutral methods to
Speaker 1: foster diversity. Can you describe those methods, Audrey. So the
Speaker 1: way they are choosing students for this school is completely
Speaker 1: race neutral. When the applicants are being considered, there is
Speaker 1: no indication of their name, their gender, or their race
Speaker 1: on the applications. Everybody is given an application number and
Speaker 1: that's how they are considered. So then they also take
Speaker 1: a certain percentage from every middle school that is within
Speaker 1: the area that this high school covers, but that's all
Speaker 1: race neutral as well. So the way they're choosing students
Speaker 1: is completely race neutral. The reason why um the lower court,
Speaker 1: the district court here found that that on its face
Speaker 1: race neutral admissions program violated the Constitution. Was because the
Speaker 1: court found that, compared to the admissions program they had before,
Speaker 1: their new admissions program had a disparate impact on Asian
Speaker 1: American students. And the court also found that the school
Speaker 1: boards whole process was the word he used, was infected
Speaker 1: with racial balancing, which the district court found is unconstitutional.
Speaker 1: So we said, even though it is the race neutral
Speaker 1: on its face, the school board had an unlawful intent
Speaker 1: to harm a particular racial group and their plan indeed
Speaker 1: has a disparate impact on Asian Americans if it's race
Speaker 1: neutral on its face. Due courts usually dig into the
Speaker 1: intent or this is expected intent, Well, they they do
Speaker 1: the on its face, the law the district court applied
Speaker 1: is the appropriate law, and the school board doesn't argue
Speaker 1: with the legal tests. What the school board argues with
Speaker 1: is that the district court got the facts wrong, um,
Speaker 1: And they said that when you look at the facts, uh,
Speaker 1: there was no intent to harm any particular racial group.
Speaker 1: What the school board says they were trying to do,
Speaker 1: and they say, all the findings that you can make
Speaker 1: is that the school board was trying to gain a
Speaker 1: more diverse student body in the school, measured by geography,
Speaker 1: measured by English language learner status, measured by socio economic background,
Speaker 1: and measured by race. And so there there are um
Speaker 1: statements in the record that show that the school board
Speaker 1: was paying attention to race and how they could get
Speaker 1: greater racial diversity. But they say that's not the same
Speaker 1: thing as saying that the school board had an intent
Speaker 1: to harm any particular racial group or to have an
Speaker 1: adverse impact on any particular racial group. The group challenging this,
Speaker 1: what is it they want? Do they want the school
Speaker 1: just to admit students based on their tests, on their
Speaker 1: g p A. How do they want the school to
Speaker 1: admit students? Well, they don't want the They don't want
Speaker 1: the admissions program that the school board enacted. How exactly
Speaker 1: they want it changed is not clear from the court
Speaker 1: record that I have seen. I don't know if they
Speaker 1: are asking to go back to the process exactly how
Speaker 1: it was before. I think that from the papers, what
Speaker 1: they're saying is they want the school board to come
Speaker 1: up with some other process that is constitutional, and to
Speaker 1: do that in the matter of weeks and make the
Speaker 1: new choices in a way that does not harm um
Speaker 1: Asian Americans to the same extent, or that actually does
Speaker 1: not harm them at all. The Supreme Court turned this away.
Speaker 1: It was on what's called the shadow docket, an emergency request.
Speaker 1: Did it say anything about the issue itself or could
Speaker 1: it just have turned it away because they'd argued that
Speaker 1: it was you know, it was too late to make changes, right.
Speaker 1: So what happened after the district court found that the
Speaker 1: plan was unconstitutional and the district court actually enjoined the
Speaker 1: school board from using that admissions plan, then the school
Speaker 1: board went to the Court of Appeals and the Court
Speaker 1: of Appeals said, you know, hey, it's going to be
Speaker 1: way too hard for the school board to put a
Speaker 1: new plan in place in this amount of time. But
Speaker 1: the judges on the Court of Appeals for the Fourth
Speaker 1: Circuit also said, you know, we think that the district
Speaker 1: court might have gotten this wrong. Disrecourt shouldn't have given
Speaker 1: summary judgment. There are there are disputed facts here, um,
Speaker 1: and they may have cut The distrec Court might have
Speaker 1: come to the wrong factual conclusions as to disparate impact
Speaker 1: and the school board it's intent. So we're going to
Speaker 1: um put a stay on the injunction. So then it
Speaker 1: went to the Supreme Court and the student group is
Speaker 1: now saying, please vacate the stay, so we have an
Speaker 1: injunction again so the old so that the new plan
Speaker 1: won't go into effect. So on the one hand, it
Speaker 1: doesn't say anything at all, because there is a very
Speaker 1: high standard, at least on paper, for the Supreme Court
Speaker 1: to reach down and and say, you know, we are
Speaker 1: going to um with no real briefing, with no real argument,
Speaker 1: We're going to undo what the Court of Appeals has done.
Speaker 1: It's a very high standard. One of the things that
Speaker 1: some lawyers are complaining about or raising some concerns about,
Speaker 1: is that over the last you know, two or three
Speaker 1: years or maybe five years, the court seems to have
Speaker 1: in practice loosen that standard, even though on paper it's
Speaker 1: the same. So on the one hand, you say, there's
Speaker 1: nothing to be learned about here. They didn't meet the
Speaker 1: very high standard. But the thing that is a little
Speaker 1: more concerning is that there were three justices who dissented
Speaker 1: from that decision. There's nothing written, so there's no opinion written,
Speaker 1: but Justice Thomas, Justice Alito, and Justice Corsus would have
Speaker 1: granted the application to vacate the stay, which means that
Speaker 1: from their perspective, they think that the Court would take
Speaker 1: this case to review it, that there is irreparable harm
Speaker 1: being visited on these Asian American students by the new plan,
Speaker 1: and that there's a likelihood success for the Asian American students.
Speaker 1: So they've already got three votes um at the Supreme Court.
Speaker 1: If they can get the case there or likely do,
Speaker 1: the Supreme Court would say, well, this is you know,
Speaker 1: a preliminary vote on something like this doesn't tell you
Speaker 1: exactly how will vote at the end of the day,
Speaker 1: but it usually does, so that's the most eesting thing.
Speaker 1: They've got three votes now if they were to make
Speaker 1: it to the Supreme Court. But isn't it surprising that
Speaker 1: they don't have the Chief Justice? No, I don't think
Speaker 1: it's surprising at all, June that they don't have the
Speaker 1: Chief Justice on this, because the Chief has been more
Speaker 1: likely to stick to the court real test of we
Speaker 1: are not going to give emergency relief on a case
Speaker 1: unless they meet this very high standard. And having to
Speaker 1: make the school district change their admissions policy in such
Speaker 1: a very short period of time, I think is something
Speaker 1: that would usually, you know, weigh against doing that. In
Speaker 1: a situation like this, So that's not a huge surprise.
Speaker 1: We've talked before about the what's coming next term at
Speaker 1: the Supreme Court, this showdown over affirmative action, if you will,
Speaker 1: in cases involving Harvard College and the University of North Carolina.
Speaker 1: Is this different because those programs explicitly take account of
Speaker 1: race as one factor among many, where as this high
Speaker 1: school program uses race neutral criteria. So is it different, Yes, Junior, right,
Speaker 1: it's different because of that. And the Supreme Court, though,
Speaker 1: has already dated out that things are different at K
Speaker 1: twelve schools rather than at schools of higher education. So
Speaker 1: whereas the Court has clearly held in the precedent that's
Speaker 1: being challenged this coming term that colleges and universities do
Speaker 1: have a compelling interest in a diverse student enrollments and
Speaker 1: that they may use race conscious measures to forward those
Speaker 1: means as long as they're narrowly tailored, there's not really
Speaker 1: a holding from the Supreme Court for K twelve institutions
Speaker 1: the same way. And that's from a case from two
Speaker 1: thousand and six called Parents Involved in Community Schools versus Seattle,
Speaker 1: And that's that's the case that the lawyers who are
Speaker 1: representing the plainists in this Thomas Jefferson High School case.
Speaker 1: Specific Legal Foundation, the Pacific Legal Foundation is very interested
Speaker 1: in efforts to create more racially diverse student enrollments in
Speaker 1: K twelve schools, so they are on the lookout for
Speaker 1: cases that they can support to further their efforts in
Speaker 1: what they believe are improper uses of race. Even when
Speaker 1: the school boards say this is race neutral, we're not
Speaker 1: using race at all, as in this case, the Specific
Speaker 1: Legal Foundation will sometimes say, oh, but these other things
Speaker 1: you're doing our our pretext for using race. And in fact,
Speaker 1: when the parents involved in the Community Schools case was
Speaker 1: argued on the Pacific Legal Foundation and other amiki, we're
Speaker 1: trying to push the court to not only say that
Speaker 1: school boards can't use race conscious measures, they were also
Speaker 1: trying to get the court to go so far as
Speaker 1: to say that any time that a school to strict
Speaker 1: talks about the racial components of their school, talks about
Speaker 1: trying to take any race neutral steps to create a
Speaker 1: greater diversity in a school, that that was unconstitutional because
Speaker 1: the Constitution is supposed to be color blind, and so
Speaker 1: governmental actors should not be talking about race at all.
Speaker 1: So I see that this is kind of a step
Speaker 1: towards them maybe trying to cement that idea as law.
Speaker 1: Thanks for your insights, Audrey. That's Audrey Anderson, who heads
Speaker 1: the higher education practice at Basparian SIMS. I'm June Grosso
Speaker 1: and you're listening to Bloomberg.