Post Summary
That the real story isn't the SEC's failure alone, as David Einhorn argued, but the collective failure of the entire "financial village," including banks, investors, and investment consultants, to detect and act on available warning signals.
Archegos's failure to file a Form 13F, which would have disclosed its large securities positions, including derivatives, to the public and to regulators.
Archegos operated under the "family office" exemption, meaning it did not need to register as an investment adviser with the SEC, and it either believed it did not need to file a Form 13F or simply chose not to.
Banks, who financed the securities Archegos should have reported; investors, who could have reconciled reported positions against Archegos's public filings; and investment consultants, who could have identified the missing 13F during compliance due diligence.
Because the SEC has stated it does not review filings like Form 13F for accuracy, consistency, or frequency, making it structurally unable to unilaterally detect a failure like this, and because regulatory arbitrage is described as "booming" under the current rules-based system.
Why Does the Archegos Collapse Repeat a Familiar Pattern?
The Archegos financial fiasco reminds me of the phrase coined by French writer Jean-Baptiste Alphonse Karr: "Plus ça change, plus c'est la même." – The more things change, the more they remain the same. In his latest investor letter, hedge fund titan David Einhorn calls out the SEC for its lack of action on what he considers the 'real story' of the Archegos Capital implosion. However, we believe the real and perhaps ugly story is our industry's collective failure to call out suspicious activity.
Once again, our financial village ignored, overlooked or failed to understand signals suggesting that not all was quite right about Archegos. The result? Poof, another $8–$20bn goes up in smoke. Until our village members wake up to these signals, the losses and finger pointing will continue. It is time for a different approach.
What Did David Einhorn Say About the SEC's Role?
According to media reports Einhorn slammed the SEC for not seeing the poor risk management of banks and excessive leverage assumed by Archegos. He says that caused people to miss how Archegos 'cornered the market' and drove a massive gain in a stock that short sellers say faked sales. The New York Times points to Archegos's failure to file Form 13F, which would have signalled its large positions in securities, including derivatives; that is, of course, if anyone pays attention to what is in these filings.
And just think that six months ago the SEC considered increasing the 13F reporting thresholds from $100m to $3bn. Just imagine if that was ratified. This all sounds remarkably familiar. Who remembers LTCM?
Why Has Convergence Studied 13F Filings for a Decade?
A failure to file -
Archegos' failure to file a 13F is an interesting angle to explore. Convergence has studied 10 years of 13F filings. They are one of many filings within the regulatory filing tool-kit that banks, investors, service providers and regulators can use to supplement their risk management oversight, yet they do not. So why? Well, the SEC makes it clear that they do not check regulatory filings for accuracy, consistency or frequency. And since they are not checking them for accuracy, it is unlikely they are attempting to identify those who fail to file them. As many of our colleagues know, regulatory filings are often inaccurate, incomplete and inconsistently produced, making comparisons difficult. And on top of this, the filings are loaded with technical jargon, making them impossible for mere mortals to understand. So, why would they bother?
Why Doesn't Convergence Agree That the SEC Is Solely to Blame?
While Mr Einhorn's investors and others may agree with his criticism of the SEC, Convergence does not agree because it is simply too easy to blame them in this case; and the problem is beyond the SEC's ability to police it on their own. Let's be honest, the business of regulatory arbitrage is booming in our rules-based system, and while there is much more the SEC can improve, there are plenty of others involved in our financial village who were in a position to smell this particular rat.
What Opportunities Did the Financial Village Miss?
Opportunities for next time -
Let us do a quick rollcall of those in our financial village and point out a few of the opportunities to keep this from happening in the future:
How Did Archegos Avoid the SEC's Radar Screen?
How did Archegos avoid being on the SEC radar screen and how did it avoid filing a 13F?
Not on The SEC radar screen: The old 'family office' loophole exists so they did not need to register as an adviser with the SEC. This means no transparency into the entity and its business via Form ADV analysis.
Failure to File a Form 13F: Archegos either believed they did not have to file, or simply decided not to file. Lawyers will debate the nuances of this question well after the next scandal hits us.
What Would a "Village" Approach Have Changed?
This is why the 'village' approach is so desperately needed. Had the banks been aware that Archegos may not have been meeting their 13F reporting requirements, they could have dug deeper into the reasons why. If investors and their agents replaced blind trust with informed trust and attempted to reconcile the positions reported to them to Archegos's 13F, they would have detected that no 13F was on file. And if the SEC plugged the loopholes that exist for family offices and pay more attention to regulatory filing existence and quality then perhaps these issues can be identified earlier.
And for public companies, such as Viacom, whose stock price plunged 27% as Archegos liquidated its holdings, they would have had more transparency into who owned their shares and what was driving the stock market fluctuations. No one has a crystal ball, so it is a question for the ages.
Convergence calls for all in our financial village to improve their ability to detect risk signals and use the power they have to minimise the wreckage created by Archegos in the market.
It does not need to be this way. The technology and tools are there to detect the very signals that can save so many from the bad acts of so few. So why do we continue being victimised by the likes of Archegos? And then I woke up to the reality that within our financial village: "Plus ça change, plus c'est la même."
If you want to learn how to use risk signals to reduce your risk of being victimised by bad actors, email me at jphinney@convergenceinc.com.
About the Author
John Phinney is the founder and chairman of Convergence. He held the chief financial and chief operating officer roles at several of today's leading alternative and traditional asset managers including Apollo, JPMorgan, Rohatyn Group and Fidelity. He developed, implemented and managed the infrastructure needed to support growth. Phinney graduated Cum Laude from Suffolk University in Boston, Ma earning a BSBA in accounting and from The United States Marine Corp Officer Candidate PLC programme. He is a board member of the Marginal Way Preservation Fund in Maine.
Key Points
What does Phinney argue is the real story behind the Archegos collapse, and how does this differ from David Einhorn's public criticism?
- Einhorn's criticism is stated directly: David Einhorn, in his investor letter, "calls out the SEC for its lack of action on what he considers the 'real story' of the Archegos Capital implosion."
- Phinney explicitly disagrees with placing blame on the SEC alone: The piece states "Convergence does not agree because it is simply too easy to blame them in this case; and the problem is beyond the SEC's ability to police it on their own."
- Phinney's alternative framing centers on collective industry failure: The piece states the real story is "our industry's collective failure to call out suspicious activity."
- The piece uses a repeated French phrase to frame this as a recurring pattern: "Plus ça change, plus c'est la même" (the more things change, the more they remain the same) opens and closes the piece, framing Archegos as history repeating rather than a novel failure.
What did Einhorn specifically criticize, and what broader historical parallel does Phinney draw?
- Einhorn's specific criticism targeted the SEC's oversight of leverage and risk management: According to media reports cited in the piece, Einhorn "slammed the SEC for not seeing the poor risk management of banks and excessive leverage assumed by Archegos."
- The New York Times is cited for a specific procedural failure: The piece states "The New York Times points to Archegos's failure to file Form 13F, which would have signalled its large positions in securities, including derivatives."
- A specific, recently considered regulatory change is referenced: The piece notes that "six months ago the SEC considered increasing the 13F reporting thresholds from $100m to $3bn," a change that, had it been adopted, would have made Archegos-style non-disclosure even easier for larger managers to avoid scrutiny under a higher threshold.
- A historical parallel is drawn explicitly: The piece asks "who remembers LTCM?", referencing the 1998 Long-Term Capital Management collapse as a prior instance of the same underlying pattern.
Why has Convergence studied Form 13F filings, and what does the piece say about why these filings go unchecked?
- Convergence's own research scope is stated directly: "Convergence has studied 10 years of 13F filings."
- Form 13F is positioned within a broader regulatory filing toolkit: The piece describes it as "one of many filings within the regulatory filing tool-kit that banks, investors, service providers and regulators can use to supplement their risk management oversight, yet they do not."
- The core reason given is the SEC's own stated non-review practice: "The SEC makes it clear that they do not check regulatory filings for accuracy, consistency or frequency," which the piece argues makes it "unlikely they are attempting to identify those who fail to file them."
- General filing quality is described as a contributing factor: The piece states regulatory filings "are often inaccurate, incomplete and inconsistently produced, making comparisons difficult," and are additionally "loaded with technical jargon, making them impossible for mere mortals to understand."
Which specific parties does Phinney identify as having missed opportunities to catch Archegos's Form 13F failure, and what could each have done differently?
- Banks were positioned to notice the disclosure gap through their own financing relationship: The piece states banks "finance the securities that Archegos should have reported in a Form 13F filing" and that the failure to file "should trigger some level of additional inquiry as to why."
- Investors were positioned to catch the gap through reconciliation: The piece states investors "were in a good position to reconcile the positions reported to them by Archegos in portfolio updates and account statements to Archegos's 13F filings," since the SEC publishes these filings specifically so investors can track large managers.
- Investment consultants were positioned to catch the gap through compliance due diligence: The piece states they "were in a good position to identify Archegos's failure to file 13F if they perform compliance due diligence on behalf of investors."
- The SEC is explicitly described as structurally unable to catch this alone: The piece states the SEC "were not in a good position to unilaterally detect Archegos-like 13F filing failures," given its own stated practice of not reviewing filings for accuracy.
- The same neglect is said to extend across multiple regulatory forms: The piece states "Form 13F, Form ADV, Form D and Forms 3&4… all suffer from similar neglect," extending the argument beyond the single Form 13F failure.
How did Archegos specifically avoid regulatory visibility, according to the piece?
- The family office exemption removed one layer of transparency: The piece states "the old 'family office' loophole exists so they did not need to register as an adviser with the SEC," which meant "no transparency into the entity and its business via Form ADV analysis."
- The Form 13F failure removed a second layer of transparency: The piece states "Archegos either believed they did not have to file, or simply decided not to file," and notes that "lawyers will debate the nuances of this question well after the next scandal hits us."
- Both gaps combined to leave Archegos effectively invisible to standard oversight mechanisms: Neither adviser registration nor position disclosure applied to Archegos, removing two of the primary regulatory visibility tools simultaneously.
What real-world market consequence does the piece cite, and what does Phinney argue would have been different under a "village" approach?
- A specific, named market consequence is cited: The piece states Viacom's "stock price plunged 27% as Archegos liquidated its holdings."
- Three specific counterfactual actions are described under the "village" approach: Banks digging deeper into Archegos's non-compliance, investors and their agents reconciling reported positions against public 13F data, and the SEC closing the family office loophole and paying closer attention to filing existence and quality.
- Public company transparency is named as an additional benefit: The piece states that companies like Viacom "would have had more transparency into who owned their shares and what was driving the stock market fluctuations" under this approach.
- The piece closes by reiterating its central call to action: Convergence "calls for all in our financial village to improve their ability to detect risk signals and use the power they have to minimise the wreckage created by Archegos in the market."