30 years ago, George Soros made $1 billion on a FX trade that many said then smacked of manipulation and the Hungarian was lucky to avoid arrest. Today, his protege was not so lucky.
Neil Phillips, the co-founder and CIO of UK-based hedge fund Glen Point Capital was charged with scheming to manipulate the FX market, the DOJ revealed in an unsealed indictment this morning. The 52-year-old was arrested in Spain on a request from the US earlier this week; he was charged with conspiring to manipulate the US dollar-South African rand (USD/ZAR) exchange rate during thin volume trading on Christmas Day 2017 to trigger a $20 million payment under a barrier options contract.
Glen Point had about $1.5 billion in capital at the start of the year and was originally started by former BlueBay fund managers Jonathan Fayman and Phillips, who ran a $1.4 billion macro hedge fund at BlueBay from 2009 to 2014. The fund was seeking to sell itself to hedge fund Eisler Capital – run by former co-head of Goldman’s global securities unit Ed Eisler – as recently as March, but the deal fell apart “due to disagreement over the level of risk Glen Point’s fund could take”. The two London-based firms started in 2015 and trace their roots back to macro trading. Eisler has been expanding into other strategies in a bid to compete with industry giants such as Millennium Management and Citadel for capital and talent.
Glen Point received its seed capital from billionaire George Soros, an famous FX and macro trader himself, who is one of the fund’s original backers.
According to prosecutors, Phillips bought a digital option for the USD/ZAR currency pair in late October 2017 that was set to expire on Jan. 2, 2018. The option had a notional value of $20 million and a barrier rate of 12.50 ZAR to USD, and entitled the fund to a $20 million payment if the rate went below 12.50 before the expiration date.
With the option set to expire, Phillips began making spot trades in an effort to push the exchange rate lower late on Christmas Day, while directing a Singapore-based employee of an unidentified bank to sell $725 million in exchange for more than 9 million in South African rand, according to prosecutors. That pushed the exchange rate below the trigger, allowing Phillips to collect more than $15.6 million from the deal, according to the statement.
More details from the DOJ statement:
Damian Williams, the United States Attorney for the Southern District of New York, and Michael J. Driscoll, the Assistant Director-in-Charge of the New York Field Office of the Federal Bureau of Investigation (“FBI”), announced the unsealing of an Indictment charging NEIL PHILLIPS, the co-founder and chief investment officer of a hedge fund based in the United Kingdom, with conspiracy to commit commodities fraud, conspiracy to commit wire fraud, commodities fraud, and wire fraud in connection with a scheme to artificially manipulate the United States dollar (“USD”) / South African rand (“ZAR”) exchange rate to fraudulently trigger a $20 million payment under a barrier options contract. PHILLIPS was arrested in Spain earlier this week at the request of the United States.
U.S. Attorney Damian Williams said: “As alleged, Neil Phillips — the co-founder and chief investment officer of a prominent U.K. hedge fund — manipulated the FX market in order to unlawfully obtain millions of dollars in payments for his hedge fund under an options contract. 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 J. Driscoll said: “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.”