In the world of investing, there are 2 important elements which describes the flow of money – if someone makes more than normal, money flows in that direction. If the same someone loses money, the lawsuits come out. This means when an investment manager or fund does better than everyone else, although the advertisements say past performance is no indication of future performance, money will flow to that fund or similar type of profits. If the fund loses money there are plenty of law firms and securities regulators who will investigate and occasionally charge the managers.

In an article by Brendan Person and Jody Godoy of Reuters, Sung Kook (Bill) Hwang founder of Archegos Capital is charged with racketeering conspiracy and 10 counts of fraud and market manipulation and the trial is happening in New York.

The firm Archegos Capital caused more than $100 billion in shareholder losses at companies in its portfolio. The firm is accused of using derivatives to secretly amas positions in multiple stocks that were so large they eclipsed that of the companies’ investors driving up stock prices.

The prosecutors claim Mr. Hwang then lied about the holdings to sustain their business relationship with global banks. (the use of derivatives means the use of credit). Prior to his selection of the stocks he picked, he had used the same strategy to make extra profits. Having made extra profits, the banks gave his firm greater access to credit.

Mr. Hwang used total return swaps to take outsized stakes in his favourite stocks without actually owning the stock. The family firm at its peak had $36 billion in assets and $160 billion of exposure to equities. Some of the favorites stocks prices fell which meant the global banks did margin calls and Mr. Hwang had no money to put up. This led to banks dumping the swaps which caused losses for Archegos and its lenders.

Linking to dividend paying stocks, for the average dividend investor, they own the stocks without any use of credit. Although it is possible to arrange to buy stock and use the dividend payments to pay the interest, depending on the size of the dividend. If a person buys the stock with no credit, then as stocks go up and down, it matters less, because the desire is to collect the dividend for a few years or more. If the dividend payment goes up, then it is even better investment. Mr. Hwang’s trail is a reminder that the most important rule for an investor is try not to lose money.

There are more questions than answers, till the next time – to raising questions.