Hedge fund Glen Point Capital was thrown into the headlines this week when its co-founder and co-chief investment officer Neil Phillips was arrested i
Hedge fund Glen Point Capital was thrown into the headlines this week when its co-founder and co-chief investment officer Neil Phillips was arrested in Spain over a string of charges relating to wire fraud, commodities and foreign exchange manipulation.
The 52-year-old London-based hedge fund executive allegedly manipulated the FX market in order to unlawfully obtain millions of dollars in payments for his hedge fund under an options contract, US attorney for the Southern District of New York Damian Williams said on 1 September.
$20m ‘one touch’ option at the centre of charges
Phillips was arrested at the request of United States prosecutors following an investigation into alleged wire fraud, including manipulation of the US dollar to South African rand exchange rate, to trigger a $20m payment under a ‘barrier’ options contract — a type of derivative where the payoff depends on the underlying asset reaching or exceeding a predetermined price.
The investigation concerned activities Glen Point conducted in October 2017, according to Manhattan federal court documents unsealed this week, when the hedge fund purchased the ‘one touch’ option for the USD/ZAR pair, which was set to expire on 2 January 2018.
The option had a notional value of $20m and a 12.50 rand to dollar barrier rate. Glen Point stood to benefit from a $20m payment under the option terms if the USD/ZAR rate dropped beneath the 12.50 rate.
The hedge fund allocated some of this notional $20m value to a client, which would ensure a payment of $4.3m, in the event the option was triggered.
Other finance firms were also party to the transaction which Glen Point purchased via a financial services intermediary that conducted trades on behalf of underlying clients, prosecutors said in court documents. Two banks headquartered in Manhattan were part of the transaction, with one obligated to make the $20m payment if the option was triggered, while the other acted as Glen Point’s prime broker for the transaction.
The New York prosecutors said in their statement: “The allegations in the indictment are merely accusations, and the defendant is presumed innocent unless and until proven guilty.”
Glen Point was contacted for comment by Financial News, as was Phillips’ Washington DC-based lawyer William J. Stellmach.
Twilight trading between Christmas and Boxing Day
With just days to go before the expiry of the option, Phillips “engaged in a scheme to intentionally and artificially manipulate the USD/ZAR rate”, prosecutors said, to drive the rate below 12.50 and trigger payment under the $20m option.
“Phillips caused and sought to cause the USD/ZAR exchange rate to fall below 12.50 by engaging in FX spot trades in which he caused hundreds of millions of USD to be exchanged for ZAR. Phillips engaged in this USD/ZAR FX spot trading for the express purpose of artificially driving the USD/ZAR rate below 12.50,” they said.
“On December 26, 2017, in the hours that followed the completion of the USD/ZAR FX spot trading directed by Phillips, the USD/ZAR rate once again increased and returned to levels above the 12.50 barrier and did not go below that rate for the remainder of the day.”
What happened next?
The Glen Point executive, in less than an hour between midnight London time on Christmas Day, 25 December 2017, and approximately 12:45 London time on Boxing Day, 26 December 2017, reached out to a Singapore-based employee of a bank, according to prosecutors.
In court papers, prosecutors said Phillips “personally directed” the Singapore-based bank employee “to sell” on behalf of Glen Point, a total of approximately $725m in exchange for approximately 9 billion rand.
“During the course of that approximately one-hour period, Phillips, through his trading, caused the USD/ZAR rate to fall substantially until the rate went just below 12.50,” prosecutors said.
They added: “As soon as Phillips had achieved his objective and the USD/ZAR rate fell below 12.50 due to Phillips’ manipulative spot trading activity,” he immediately directed the Singapore bank employee to stop trading.
Communication via Bloomberg chat messages
The instructions from Phillips to the Singapore bank staffer took place via Bloomberg chat messages. During this time, Phillips was in South Africa.
His messages “expressly stated” that his purpose in directing the trades “was to drive the USD/ZAR rate below 12.50”, the court papers said. He stated, among other things, “my aim is to trade thru 50,” “[n]eed it to trade thru 50.4990 is fine,” and “[g]et it thru,” according to prosecutors.
Phillips asked for proof “of the print” after the Singapore bank employee told him the USD/ZAR had traded below 12.50.
$20m option triggered ‘minutes’ after rate fall
Prosecutors say that “minutes” after “Phillips caused the USD/ZAR exchange rate to fall below 12.50 through his manipulative trading”, he instructed a Glen Point staffer to inform one of the intermediary firms that were party to the transaction, that the $20m option had been triggered.
The Glen Point employee did not, however, relate that the rate falling blow 12.50 was a result of Phillips’ manipulation, prosecutors said.
The fraudulent triggering of the option meant Glen Point received a wire transfer of $15,660,000 while its client fund received a wire transfer of $4,340,000, according to the court claim.
Charges in full
Phillips has been charged with one count of conspiracy to commit commodities fraud, which carries a maximum sentence of five years in prison, one count of commodities fraud, which carries a maximum sentence of 10 years in prison, one count of conspiracy to commit wire fraud and one count of wire fraud, each of which carry a maximum sentence of 20 years in prison.
FBI assistant director Michael J. Driscoll said in a 1 September statement that Phillips is alleged to have 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,” Driscoll said.
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