The United States Attorney’s Office in New York has charged the co-founder and chief investment officer of a UK-based hedge fund with manipulating the US dollar/rand exchange rate to trigger a $20 million payment under an options contract.
Neil Phillips was arrested in Spain last week at the request of the US, a statement issued on Thursday by the US Department of Justice said. Phillips faces possible extradition to the US.
The statement was issued after the US Attorney for the Southern District of New York and the assistant director in charge of the Federal Bureau of Investigation’s New York field office announced the unsealing of the indictment against Phillips. The indictment was filed in a New York federal court in March.
Neither the statement nor the indictment name Phillips’s firm, but the description provided by prosecutors matches Glen Point Capital, a macro hedge fund firm he started with his former BlueBay Asset Management colleague Jonathan Fayman and money from investors, including George Soros.
According to the indictment, in late October 2017, Phillips’s hedge fund purchased a “one touch” digital option for the dollar/rand currency pair that was set to expire on January 2, 2018. The option had a notional value of $20m and a barrier rate of R12.50 to the dollar.
Under the terms of the option, if the dollar/rand exchange rate went below 12.50 at any point before January 2, 2018, the hedge fund would be entitled to a $20m payment.
The fund subsequently allocated a portion of the $20m notional value to a client’s fund, thereby entitling the client to receive $4.34m if the option was triggered.
Between early November and mid-December 2017, the rand traded between about R14.50 and R13.15.
According to the indictment, on 18 December 2017, the dollar/rand exchange rate dropped significantly, to as low as R12.52, on the news that Cyril Ramaphosa had been elected to replace Jacob Zuma as leader of the ANC.
On 26 December 2017, with the option set to expire in a matter of days without having been triggered, Phillips engaged in a scheme to manipulate the rand/dollar rate to drive it below 12.50, the US Attorney’s Office alleges.
“Phillips caused and sought to cause the exchange rate to fall below 12.50 by engaging in foreign exchange spot trades in which he caused hundreds of millions of dollars to be exchanged for rands,” the prosecutors allege.
Text messages from South Africa
According to the indictment, in less than an hour between shortly before midnight (London time) on 25 December 2017 and about 12.45am (London time) on 26 December 2017, Phillips directed a Singapore-based bank employee to sell, on behalf of the hedge fund, about $725m in exchange for more than R9bn. This resulted in the dollar/rand rate falling substantially until it went just below 12.50.
There are unconfirmed reports that the bank in question is Japan’s Nomura Holdings.
Phillips, who was apparently in South Africa at the time, is alleged to have provided trading instructions to the employee through Bloomberg chat messages.
The prosecutors allege that Phillips directed the employee to continue selling until the rate fell below 12.50. They claim he expressly stated that his purpose in directing these trades was to drive the rate below 12.50, saying, 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”.
Once the employee informed Phillips that the currencies had traded at below 12.50, it is alleged that he immediately instructed the employee to “stop” trading and asked for proof “of the print”, the prosecutors allege.
In the hours that followed the completion of the alleged spot trading directed by Phillips, the dollar/rand rate once again increased and returned to levels above 12.50 and did not go below that rate for the rest of the day.
As a result of triggering the option, the hedge fund received $15.66m and the client’s fund received $4.34m. The hedge fund reported a 6% return for December 2017, according to the indictment.
The US Attorney’s Office has charged Phillips with:
- Conspiracy to commit commodities fraud, which carries a maximum sentence of five years in prison;
- Commodities fraud, which carries a maximum sentence of 10 years in prison;
- Conspiracy to commit wire fraud, which carries a maximum sentence of 20 years in prison; and
- Wire fraud, which also carries a maximum sentence of 20 years in prison.
Other financial institutions were party to the transaction, prosecutors said, including the subsidiary of a bank headquartered in New York that paid the $20m option; another bank headquartered in New York that acted as the fund’s prime broker; and a financial services firm that facilitated the purchase of the option. None of the firms were identified.
Various news agencies have attempted to obtain comment from Phillips or his legal representative, but to date they have been unsuccessful.
Masked by ‘Ramaphoria’?
It seems that Phillips’s alleged spot trades went unnoticed because traders were too caught up in “Ramaphoria” to notice anything untoward. The rand gained 11% in December 2017 as Ramaphosa’s promise to clean up corruption and nepotism in the government and state-owned companies sparked enthusiasm in the markets.
“The focus was on Ramaphosa and the excitement that brought to a whole number of domestic issues,” said Henrik Gullberg, a macro strategist at Coex Partners. “So, it’s hard to disentangle what was related to that and what could have been other factors, but at the time I can’t say I remember that I found something odd.”
Robert Hoodless, the head of foreign exchange and macro analysis for Europe and Americas at in Touch Capital Markets, said: “Ultimately the buyers of rand were proved right, as the move continued until late February before starting to reverse. The more disturbing speed seen in mid-December appears somewhat at odds with other days’ trading in the month, but the rand is well known for being chaotic and likely to produce some of the larger standard-deviation moves in the forex world.”
High-profile fund
Phillips worked at Morgan Stanley and Lehman Brothers before joining BlueBay, owned by Royal Bank of Canada, in 2005 as a money manager. He started managing a macro strategy within the firm’s multi-strategy fund in 2007 and went on to manage the firm’s standalone macro hedge fund two years later.
BlueBay closed the $1.4bn macro fund after Phillips and Fayman left in November 2014 to found Glen Point.
The firm enjoyed a high profile because it was among a small number of hedge funds to raise new money in 2016, when investors were pulling billions from the industry, according to research firm eVestment.
Macro traders, who try to profit from global economic trends by betting on interest rates and currencies, frequently focus on South Africa.
The rand is the fifth-most traded emerging-market currency in the world, with average daily turnover on global markets of $72bn in 2019, the latest year for which full data are available, according to the Bank for International Settlements. That’s on par with Russia’s ruble and more active than Brazil’s real and Turkey’s lira.
Regulatory crackdown
US regulators have been cracking down on market manipulation since the global financial crisis more than a decade ago. Dozens of banks and traders have been accused of rigging markets, including interest rates and precious metals, and even lying to customers about the prices of asset-backed securities.
“How utterly bizarre that US prosecutors are chasing a London-based hedge fund for currency manipulation in Singapore,” said Andrew Beer, the founder of New York-based Dynamic Beta Investments. “The golden age of regulation may well be upon us.”
However, Rosa Abrantes-Metz, the co-leader of policy advisory firm Brattle’s global antitrust and competition practice and a senior competition policy adviser for the World Bank, said that proving market manipulation is very difficult. In his defence, Phillips may argue he was making aggressive but not illegal trades, she said.
