Hedge Fund Manager Loses Bid for Appeal Over FX Conviction
Posted by Colin Lambert. Last updated: March 28, 2024
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Neil Phillips, who was last year convicted of manipulation of the FX market by a New York jury, has had an appeal to have the verdict overturned, as well as his bid for a re-trial, denied by the same US court.
In an Opinion and Order, district judge Lewis Liman dismissed Phillips’ argument that the original conviction was flawed on grounds of jurisdiction along with flaws in the prosecution case. Phillips was convicted of deliberately targeting an option barrier in USD/ZAR by selling in the spot market on the morning of 26 December 2017 in Singapore.
The Full FX View
There should be little surprise that Neil Phillip’s attempt to overthrow his conviction failed -more than any other of these types of trials, which rely on “intent”, he provided evidence of that with his statements to Nomura that he needed a “print” under 12.50.
It is interesting that the judge thought the US government was wrong to claim jurisdiction on many aspects of the episode – specifically it will probably come as a relief to some that an ostensibly unrelated trade, matched on a US matching engine, does not constitute US involvement. The perceived overreach by the US government in several of these matters – the Mark Johnson case springs to mind as a trade between a UK bank and UK corporate, in the UK, that was deemed to be within US’ reach – has been a growing concern as the US legal industry has worked through these cases, mainly because some participants were afraid they would have to direct traders to other centres, in a less efficient manner.
This is not, I should stress, to hide wrongdoing from the US authorities; more, as one person put it to me, to “avoid the stress and strain of a misguided accusation from an authority that knows nothing about foreign exchange”.
This case should serve as a warning to any would-be miscreants, that communications will undermine their efforts to get away with misbehaviour – and if nothing else, it highlights just why the authorities have been so strong in going after firms for not storing and monitoring communications on channels such as WhatsApp.
At the end of the day, while Phillips still has legal channels he is able to explore, it is hard to see how he can overcome the damning evidence from the chats and phone calls. On multiple occasions he mentions disruptive trading as a means to get the market lower, and six days before the selling that was the focus of this case took place, he was discussing getting USD/ZAR below 12.50 with one of his traders.
Another factor that will block his path is how some of his own arguments were dismissed by Judge Liman. Phillips claimed he was delta hedging with his trading, but if that was the case, why did he immediately start having discussions about buying USD/ZAR following the print under 12.50?
Phillips also pointed out that he traded once more, in $100 million, after 12.50 had printed, arguing that proved his innocence, an argument the judge had little time for – he even noted there would have been, as there often is, uncertainty about the high/low in the market, thus Phillips would have wanted to make sure. This actually feeds into another topic in the FX market at the moment – the decline of the primary spot FX venues. Hopefully there will be no more episodes like that ahead, but if they do arise, how long will it be before someone in the legal profession argues the data source for such triggers is inadequate?
One final observation on the matter – the judge noted how several witnesses expressed the view that counterparties didn’t deliberately trade close to option barriers. While such behaviour is reprehensible, and frowned upon by the FX Global Code, it is a little naïve to blithely say it doesn’t happen. The suspicion is that there is too much noise around “defending barriers” in the market for it not to happen.
Of course, it may not happen and all those stories may be fuelled by desperate salespeople with nothing else to say – and that opens a whole new can of worms given how Judge Liman highlighted the role of “false signals” in the market!
In his Opinion and Order, Judge Liman found that the US government over-reached in its arguments that Phillips’ actions came within its jurisdiction because some of the spot trades Nomura executed on his behalf were through the then-Fastmatch matching engine in New York, and that Bloomberg messages were backed up to a server in the US.
He did, however, acknowledge that the fact prime broker in the deal, JP Morgan, and counterparty, Morgan Stanley, were US institutions made the conviction relevant.
As has been the case with so many of these types of trials, the conviction relied heavily upon the accused’s own communications, and in this regard Judge Liman observes, “The language from these chats is telling”. As was the case with his original trial, Liman highlighted how Phillips explicitly stated in his chats and messages that 12.50 was a “target” and how he needed “a print below 12.50”.
The judge also dismissed Phillips’ argument in his submission for reversal and/or re-trial, that the USD/ZAR trades were replenishing his delta, noting that expert witnesses told the original trial that they would in fact have increased his delta.
