The (now former) employees of defunct Archegos Capital Management - the over-leveraged family office that blew up back in March, saddling Credit Suisse and a handful of other brokers with billions of dollars in losses - have just learned a very important lesson: don't put all your eggs in one basket.
Employees saw their golden parachutes evaporate alongside the rest of Bill Hwang's $20 billion fortune when a deferred pay plan set up by the firm crashed as the firm was hit with a massive margin call, exacerbated by its prime brokers selling off billions of dollars' of stocks in the span of a few panicked hours (for more on how Archegos built up its massively leveraged position, click here).
Instead of paying employees the entirety of their bonuses in cash, the firm convinced them to keep at least some of their bonus with the firm, placing the money in a separate pot that was apparently invested in the same stocks that the firm was betting on. While insiders told the FT that the original amount of money placed with the fund was "under $50MM", the value of the pot had apparently soared alongside the value of Archegos's main fund, which enjoyed massive gains thanks to the leverage it employed via swaps entered into with its prime brokers.
"The company will increase or decrease the amount of the deferred payment by the percentage that the fund’s invested capital has increased or decreased in value,” said a document seen by the Financial Times that sets out the plan’s terms for an employee.
The document showed that 25% of the plan participant’s end-of-year bonus was held back by Archegos, to be paid out when the employee departed. It states that the payout would not fall below its original value.
Employees would be paid out when they left the firm, according to the agreement. But as it turns out, the firm's employees would have been better off had they taken the money and walked. And now, former employees are now complaining to the FT that they haven't been paid for any of the compensation they deferred.
Yet some former employees have not received any of their deferred pay, including the original sums. One person close to the firm told the FT that “the money is gone” with “no pot of gold to pay them from”. Another said Archegos employees “are in a difficult position” and “warrant sympathy”.
A representative for Archegos declined to comment.
Unfortunately, if they want their money back, Bill Hwang's former employees will need to wait in a pretty lengthy line.
Former employees of Hwang’s family office would have to queue with other creditors if the firm enters insolvency, a person close to Archegos said. Archegos has hired restructuring advisers to assess potential legal claims from banks, which are attempting to recoup some of the money they lost on its soured bets and plan for a possible wind-down of the business.
David Pauker, a financial adviser who has worked on large bankruptcies including Lehman Brothers, has been recruited as Archegos’s chief restructuring officer, according to his profile on the social network LinkedIn. Pauker declined to comment.
At this point, the DoJ might take action against Hwang before creditors see any money (this isn't the first time Hwang has been on the radar of authorities).
The DoJ has opened an investigation into into Archegos and has asked its prime brokers for information about the trades, which relied on a derivative known as a "Total Return Swap", which only required Archegos to post margin, while the prime brokers entered into the positions on behalf of the firm.
With Hwang's entire $20 billion fortunate said to have evaporated during the selloff, getting their deferred comp back will be like getting blood from a stone.
And just like that...