By Elizabeth Dilts Marshall

NEW YORK (Reuters). New details revealing the secretive behavior of Archegos Capital Management founder Bill Hwang in hiding his extremism from lenders have raised new concerns about risk management practices at global banks. This was according to former regulators as well as risk experts.

Hwang and Archegos Chief Finance Officer Patrick Halligan were both arrested Wednesday. They are accused of lying to banks in order to raise Archegos credit lines. The money was used to boost their exposure to stocks and also to manipulate the stock market, according to a Justice Department complaint.

Both deny the allegations.

Archegos declared bankruptcy in March 2021, after its value fell and the banks called their credit lines. This left global lenders including Archegos. Credit Suisse (SIX:) AG, Nomura Holdings (NYSE:), Morgan Stanley (NYSE:) & UBS Group AG(SIX:), together with losses totaling around $10 billion.

Although the Justice Department paints banks as victims, Archegos executives libel them, experts say that the indictment shows red flags banks might have been able to act on to lessen their exposure to Archegos’ aggressive trading.

This includes the inability of the fund to disclose certain details regarding its portfolio, its failure to produce evidence to support its claims, the large spike in stocks held by Archegos and its frequent breaches of credit limits.

Julie Copeland (partner at StoneTurn risk advisory firm) stated that “there were a lot of red signals that were not missed by banks.” Banks don’t want clients to go. It’s all tension.

Experts speculate that some of these bank failures might lead to civil regulators removing some branches.

An official from the Justice Department told reporters last week that they were unable to comment on any further implications for banks. On Monday, the Securities and Exchange Commission (SEC), and Commodity Futures Trading Commission (CFTC), which both brought civil charges, refused to comment.

UBS, Credit Suisse and Morgan Stanley did not respond to requests for comment. Nomura declined to comment on a request.

Archegos created highly-concentrated exposures to only a handful stocks by using equity swaps, which were written and executed by banks. According to the SEC, its positions had a high degree of leverage, some times as high as 1000%.

Archegos trade through nine banks. Each bank had only visibility to Archegos’ activities at their institution because the fund was not required by regulation to report aggregate exposures, lenders or swap positions.

Archegos frequently requested more details from banks about the trading positions of its other counterparts to give them a better understanding of their exposure. Archegos however, misled banks over its portfolio’s liquidity, composition, concentration, and liquidity.

Still, in many instances, signed certifications or even Archegos’ word was good enough for the banks, allowing it to obtain additional credit above limits the banks had previously set, the indictment shows.

UBS, according to the indictment, increased Archegos trading limits in February and March 2021 based on UBS’s assurances that included misleading information regarding its concentration in particular stocks.

Archegos demanded $248,000,000 from an unnamed bank, according to the SEC. Archegos answered a bank officer that the money was needed for portfolio rebalancing and had $9 billion in cash. Archegos was assured that the money would be wired to the bank.

In a December warning about the scandal, The Federal Reserve mentioned these failures. It warned lenders not to accept “incomplete or unverified information” from its funds.

Archegos declined to identify stocks and the precise size of its entire portfolio. The Justice Dept. said. According to risk specialists, this should have led executives and other stakeholders to ask Archegos more questions or request an independent audit.

“If a counterparty is not forthcoming with information, the bank should perform its own independent analysis,” said James Lam, president of risk consultancy James Lam & Associates. If that verification is not possible, the margin and risk rules shouldn’t be modified.

Archegos was able to hold more than 30% daily volume of Discovery (NASDAQ) Inc, and 50% free float of ViacomCBS(NASDAQ:), at one point. This significantly altered their shareholder composition, according to the indictment.

Copeland said that the massive rise in price for these companies, despite not having a fundamental cause, ought to have caused concern.

Lam said that these spikes along with Archegos’ rapid growth in capital and portfolio size should have led to a review on the underlying risk and the effectiveness of leverage.

Alma Angotti is a partner in risk management advisory firm Guidehouse. She was formerly an SEC enforcement officer.

“Maybe they weren’t able to express their skepticism and say that this isn’t logical.”