Hedge fund Glen Point Capital made headlines this week when its co-founder and co-chief investment officer Neil Phillips was arrested in Spain on a range of charges involving wire fraud, commodities and currency manipulation.
The 52-year-old London-based hedge fund manager is said to have manipulated the foreign exchange market to illegally receive millions of dollars in payments for his hedge fund under an options deal, U.S. Attorney for the Southern District of New York Damian Williams said on September 1.
$20m one-touch option at the heart of fees
Phillips was arrested at the request of US prosecutors following an investigation into alleged wire fraud, including manipulating the US dollar/South African rand exchange rate to trigger a $20 million payment under a “barrier” option deal – one Type of derivative in which the payout depends on the underlying asset meeting or exceeding a predetermined price.
The investigation involved activities Glen Point conducted in October 2017, according to Manhattan federal court documents, which were unsealed this week when the hedge fund purchased the “one-touch” option on the USD/ZAR pair, which was due to expire on January 2, 2018.
The option had a face value of $20 million and a barrier rate of 12.50 rand to the dollar. Under the terms of the option, Glen Point would benefit from a payment of USD 20 million if the USD/ZAR rate falls below the 12.50 rate.
The hedge fund allocated a portion of that $20 million notional value to a client who would ensure a $4.3 million payment if the option was exercised.
Other financial firms were also involved in the transaction, which Glen Point acquired through a financial services intermediary that transacted on behalf of underlying customers, prosecutors said in court documents. Two Manhattan-headquartered banks were involved in the transaction, one of which was obligated to make the $20 million payment if the option was exercised, while the other acted as Glen Point’s principal agent for the transaction.
New York prosecutors said in their statement, “The allegations in the indictment are allegations only, and the defendant will be presumed innocent until and until proven guilty.”
Glen Point was contacted for comment by financial newsas did Washington DC-based Phillips attorney William J. Stellmach.
Twilight trade between Christmas and Boxing Day
Just days before the option expired, Phillips “engaged in a plan to intentionally and artificially manipulate the USD/ZAR rate,” according to prosecutors, in an attempt to push the rate below 12.50 and make the payment under the 20 million trigger dollar option.
“Phillips caused and attempted to cause the USD/ZAR exchange rate to fall below 12.50 by engaging in FX spot trades, causing hundreds of millions of USD to be exchanged for ZAR. Phillips participated in this USD/ZAR FX spot trade for the express purpose of artificially pushing USD/ZAR below 12.50,” they said.
“On December 26, 2017, in the hours after the completion of the Phillips-led USD/ZAR FX spot trade, the USD/ZAR rate rose again, bouncing back to levels above the 12.50 barrier and not falling below it the rest of the day.”
What happened next?
In less than an hour between midnight London time on Christmas Day 25 December 2017 and approximately 12.45pm London time on Boxing Day 26 December 2017, the Glen Point executive reached out to a Singapore based employee of a bench to prosecutors.
In court filings, prosecutors said Phillips “personally directed” the Singapore-based banker to “sell” a total of about $725 million on Glen Point’s behalf in exchange for about R9 billion.
“During this approximately one-hour period, Phillips caused the USD/ZAR rate to drop significantly through its trading until the rate fell just below 12.50,” prosecutors said.
They added, “Once Phillips hit its target and the USD/ZAR rate dropped below 12.50 due to Phillips’ manipulative spot trading activities,” he immediately ordered the Singapore bank official to halt trading.
Communication via Bloomberg chat messages
Phillips’ instructions to the Singapore banker came via Bloomberg chat messages. During this time Phillips was in South Africa.
His notes “explicitly” stated that his aim in managing the trade “was to push the USD/ZAR rate below 12.50,” the court filings said. Among other things, he explained: “My goal is to trade to 50”, “[n]It’s okay to trade to 50.4990,” and “[g]et it through,” said the public prosecutor.
Phillips asked for proof of ‘print’ after being told by a bank teller in Singapore that USD/ZAR was trading below 12.50.
The $20 million option was triggered “minutes” after the rate decline
Prosecutors say that “minutes” after “Phillips caused the USD/ZAR exchange rate to drop below 12.50 through its manipulative trade,” he directed a Glen Point official to assign the $20 million to one of the intermediaries involved in the transaction inform option was triggered.
However, the Glen Point staffer did not say the fall to 12.50 was due to Phillips’ manipulation, prosecutors said.
The fraudulent triggering of the option meant that Glen Point received a transfer of $15,660,000 while its client fund received a transfer of $4,340,000, according to the court’s allegation.
fees in full
Phillips was charged with one count of conspiracy to commit merchandise fraud, which carries a maximum sentence of five years in prison, one charge of merchandise fraud, which carries a maximum sentence of 10 years in prison, one charge of conspiracy to commit wire fraud, and one case of Wire fraud, each carrying a maximum sentence of 20 years in prison.
FBI Assistant Director Michael J. Driscoll said in a Sept. 1 statement that Phillips allegedly manipulated global markets “to defraud financial institutions for illicit profit.”
“The FBI is committed to eradicating this type of fraud so that financial markets maintain a level playing field. As will be demonstrated today, the FBI will find fraudulent actors no matter where they are in the world and attempt to bring them back to the United States to face the consequences of their actions in our federal criminal justice system,” Driscoll said.
To contact the author of this story with feedback or updates, email Penny Sukhraj