Hedge Fund Manager Charged with FX Manipulation and Fraud

The US Department of Justice (DoJ) in the Southern District of New York has charged UK-based hedge fund manager Neil Phillips, co-founder and CIO of Glen Point Capital, with conspiracy to commit commodities fraud, conspiracy to commit wire fraud, commodities fraud, and wire fraud in connection with a USD/ZAR barrier option. Phillips has been arrested in Spain at the request of the US authorities.

The DoJ says that in late October 2017, Glen Point purchased a “one touch” digital option for USD/ZAR, set to expire on January 2, 2018, with a barrier rate of 12.5. Under the terms of the contract, Glen Point would receive a $20 million payment if the rate moved below the level, DoJ stats in a release, it subsequently allocated a portion of the notional value to a client, entitling it to receive $4,340,000 in the event that the option was triggered.

The indictment cites a written agreement entered into between Glen Point and the counterparty bank, that set forth the terms and conditions of the transaction and stated that Glen Point would be “acting in good faith and in a commercially reasonable manner”.

The DoJ then claims that on December 26, 2017 – a day in which liquidity in FX markets is severely reduced by European holidays, Phillips engaged an employee of a bank in Singapore – since identified by Bloomberg News as Nomura – to aggressively sell USD/ZAR through the level, thus triggering the payout. The DoJ says that Phillips sold around $725 million USD/ZAR in just over an hour around the Singapore open.

The DoJ points to, inevitably, Bloomberg chat messages in which Phillips shares his desire to see USD/ZAR fall through 12.50, citing messages in which he writes, “my aim is to trade thru 50,”, “need it to trade thru 50. 4990 is fine”, and “get it thru.” Once the level was brwached, the DoJ says Phillips asked for a proof of the print and asked the bank to stop selling.

“As alleged, Neil Phillips – the co-founder and chief investment officer of a prominent UK hedge fund – manipulated the FX market in order to unlawfully obtain millions of dollars in payments for his hedge fund under an options contract,” states US Attorney, Damian Williams. “Market manipulation is pernicious in all of its forms and today’s charges are a reminder that the Southern District of New York will steadfastly investigate and prosecute such activity whether it occurs in the equity market, the FX market, or elsewhere in the financial system.”

FBI Assistant Director Michael Driscoll, adds, “As alleged, Mr. Phillips maliciously manipulated global markets in order to defraud financial institutions for illicit profit. The FBI is determined to root out these types of frauds so financial markets remain a level playing field. As shown today, the FBI will find fraudulent actors no matter where in the world they are located and seek to bring them back to the United States to face the consequences of their actions in our federal criminal justice system.”