Credit Suisse Publishes Independent Review of Archegos Losses

As reported by the Financial Times, The Wall Street Journal, The New York Times, Bloomberg, Reuters, Fortune, CNN and many other media outlets, Credit Suisse published a 165-page independent investigative report by Paul, Weiss addressing the bank’s relationship with Archegos Capital Management, the family office of Sung Kook “Bill” Hwang, a former hedge fund manager.

Archegos, which used borrowed money from several banks to build massive equity positions, ultimately could not meet margin calls by its lenders when share prices dropped, triggering its default on March 25, 2021, costing the bank $5.5 billion in losses. The losses prompted Credit Suisse to appoint a special board committee, which retained Paul, Weiss to do an independent review within 90 days.

The Paul, Weiss team ultimately found no evidence of fraud or illegal conduct by individuals or the bank. Nor, the report concluded, was this a situation where the architecture of risk controls and processes was lacking, or the existing risk systems failed to operate sufficiently to identify critical risks and related concerns. Instead, the report found that senior managers persistently failed to address risks connected with trades made by Archegos. The losses “are the result of a fundamental failure of management and controls in [its] investment bank," Paul, Weiss wrote. "The business was focused on maximizing short-term profits and failed to rein in and, indeed, enabled Archegos' voracious risk-taking."

Among the key conclusions in the report, the Paul, Weiss investigation found a failure to effectively manage risk in the investment bank’s prime services business by both the first and second lines of defense, as well as a lack of risk escalation. In the same business, it also found a failure to control limit excesses across both lines of defense as a result of an insufficient discharge of responsibilities in the investment bank and in risk, as well as a lack of prioritization of risk mitigation and enhancement measures, such as dynamic margining.

The report highlights numerous actions by the bank following its losses, including the termination of numerous employees and the imposition of $70 million in penalties on employees, including bonus clawbacks.

The report also notes that Credit Suisse has already implemented a series of the report’s key recommendations, such as several changes in senior leadership at the investment bank, and the recruitment of additional resources for the risk function. In recent months, the report notes, the bank has reviewed all large group-wide exposures and has conducted a revision of limit excess controls and escalation requirements. It has reviewed and upgraded a number of risk-governance bodies, and reduced its risk appetite across the organization, among other steps. The bank has also significantly reduced the risk-weighted assets and leverage exposure in the prime services business while increasing margin requirements, and all hedge fund clients have been moved to dynamic margining. In addition, the bank has commissioned a review of double-hatted roles.

The effort involved interviews with more than 80 employees and the collection of over 10 million documents.

The Paul, Weiss team included litigation partners Brad Karp, Claudia Hammerman, Jessica Carey, Michael Gertzman, Jeffrey Recher and Alexia Korberg and counsel Jacobus Schutte; and corporate partners Manuel Frey and Marco Masotti and counsel Hilary Christian.

Access the report here.