The financial world has seen its fair share of scandals over the years, from the Madoff Ponzi scheme to the collapse of Enron. More recently, the implosion of the family office of Bill Hwang’s Archegos Capital and the fraud at Hin Leong Trading have brought the issue of financial scandals back into the spotlight. While each of these scandals is unique in its own way, they also share several common denominators.
What did they do? One common denominator among these scandals is the presence of fraud. In the case of the Madoff Ponzi scheme, the fraud was perpetrated by Madoff himself, who used new investors’ money to pay returns to earlier investors and kept the difference for himself. Similarly, the fraud at Hin Leong Trading involved the founder, Lim Oon Kuin, using company funds for personal investments and hiding billions of dollars in losses. The Archegos Capital case also has an element of fraud, as the firm allegedly failed to disclose to its prime brokers the extent of its positions and its use of leverage, which led to significant losses when the market turned against it.
Why was it so difficult to see? Another common denominator is the lack of transparency and a willingness to deceive or mislead others. In the Madoff case, the scale of the fraud was only uncovered after investors began to suspect that something was amiss and started asking questions. Similarly, the fraud at Hin Leong Trading was only exposed after the company defaulted on its debt and its true financial condition became known. In the Archegos case, the firm was able to conceal the true extent of its positions and leverage through the use of nominee accounts, and the prime brokers had limited visibility on its position.
Why the lack of loyalty? Conflicts of interest? A third common denominator is the presence of conflicts of interest. In the case of Madoff, his role as both the investment manager and custodian for his clients’ assets created a conflict of interest, as he had access to client’s funds and could use them for his own benefit. The Hin Leong Trading case also involved conflicts of interest, as the founder used company funds for personal investments which put the company’s financial stability at risk. The Archegos case also involved conflicts of interest, as the firm’s use of leverage and its focus on a small group of stocks created a situation where the firm’s interests were not aligned with those of its prime brokers.
Heavy is the head that wears the crown – not all, but some. Another common denominator among these scandals is the misuse of power or authority. In the Madoff case, his position of trust and authority as a successful investor allowed him to defraud his clients on a massive scale. In the Hin Leong Trading case, the founder’s misuse of company funds and his concealment of losses abused his position of authority as the head of the company. In the Archegos case, the firm’s use of leverage and its ability to conceal its true positions allowed it to exert a disproportionate level of influence on the market.
A victimless crime? Finally, all these scandals led to significant losses for investors, creditors, and other stakeholders, and generated public outrage and controversy. In the Madoff case, thousands of investors lost billions of dollars, and many were left financially ruined. In the Hin Leong Trading case, the company’s collapse led to widespread anger and disbelief among its creditors and employees. The Archegos case also led to significant losses for the banks that had extended credit to the firm, and raised concerns about the level of risk in the prime brokerage industry.
While these scandals share several common denominators, there are also some key differences between them:
How did each mastermind do things differently? In the Madoff case, the fraud was a classic Ponzi scheme, where new investors’ money was used to pay returns to earlier investors and Madoff kept the difference for himself. In the Hin Leong Trading case, the fraud involved the misappropriation of company funds for personal investments and the concealment of losses. In the Archegos case, while fraud has not been officially confirmed, the firm’s failure to disclose its true positions and leverage to its prime brokers could be considered a form of fraud by omission.
How bad was the impact? Another difference is the scope and scale of the scandals. The Madoff Ponzi scheme was one of the largest and most widespread financial frauds in history, affecting thousands of investors and causing billions of dollars in losses. In contrast, the Hin Leong Trading fraud was limited to a single company and affected primarily its creditors and employees. The Archegos case, while causing significant losses for the banks involved, did not have the same widespread impact as the other two scandals.
What did the authorities do? The third difference is the regulatory response to the scandals. In the Madoff case, the Securities and Exchange Commission (SEC) was criticised for failing to detect the fraud despite several red flags. In the Hin Leong Trading case, the Monetary Authority of Singapore (MAS) and the Commercial Affairs Department (CAD) launched investigations and enforcement actions against the company and its founder. In the Archegos case, the SEC and the Financial Industry Regulatory Authority (FINRA) launched investigations, and regulators are examining the role of prime brokers and the use of nominee accounts in the scandal.
Who was affected? Another important difference is the nature of the victims. In the Madoff case, the victims were primarily individual investors, many of whom were retired or nearing retirement and lost their life savings. In the Hin Leong Trading case, the victims were primarily the company’s creditors and employees, who lost their investments or their jobs. In the Archegos case, the victims were the banks that had extended credit to the firm and the investors who suffered losses as a result of the liquidation of the firm’s positions.
Who did it better? Another difference is the level of sophistication involved in the scandals. The Madoff Ponzi scheme was a relatively simple fraud that relied on Madoff’s reputation and the trust of his clients. The Hin Leong Trading fraud involved a more sophisticated level of deception, as the company’s founder used a complex web of transactions and accounting tricks to conceal the true state of the company’s finances. In the Archegos case, the level of sophistication was high, as the firm used complex financial instruments, such as total return swaps, and the use of nominee accounts to conceal its true positions and leverage.
Solo work or team effort? Another important difference is the role of outside actors. In the Madoff case, Madoff had little outside involvement as he was the one running the scheme. In the Hin Leong Trading case, there were allegations that the company’s auditor and banks had turned a blind eye to the fraud in order to maintain their relationship with the company. In the Archegos case, prime brokers and other firms have been criticised for not properly assessing the risk associated with their relationship with Archegos and for not properly monitoring the firm’s positions and leverage. This has led to calls for greater oversight and regulation of the prime brokerage industry.
Who got it worse? Additionally, the aftermath of these scandals also differ in terms of legal repercussions. In the Madoff case, Madoff was sentenced to 150 years in prison and ordered to forfeit $170.8 billion. The SEC also brought enforcement actions against several individuals and firms that were involved in the scheme. In the Hin Leong Trading case, Lim Oon Kuin, the founder and former chairman of the company, was charged with various offenses, including cheating and forgery. Several banks and other firms were also investigated by regulators for their involvement with the company. In the Archegos case, the legal repercussions are still unfolding, but it is likely that the firm and its executives will face enforcement actions from regulators and potentially face lawsuits from investors and creditors.
Saravanan Rathakrishnan is an associate of RHTLaw Asia's Corporate and Capital Markets Practice. Funds, capital markets, mergers and acquisitions are among his areas of expertise. Saravanan is engaged in the startup community, consulting a variety of startups in relation to contract terms, regulatory obligations, legal commitments and corporate structure. He maintains a keen interest in finance, economics, and law and has published a host of legal, economic and finance articles.