Neil Phillips, the founder of hedge fund Glen Point Capital, has been charged with committing forex market manipulation and fraud, according to the U.S. Department of Justice.
He was arrested last week in Spain at the request of the United States.
In late October 2017, Phillips bought a digital option for USD/ZAR set to expire on Jan. 2, 2018. The option contract had a barrier rate of 12.50 ZAR to USD and a notional value of $20 million, meaning that if the USD/ZAR exchange rate were to fall below 12.50 before Jan. 2, Phillips’s hedge fund would be entitled to a payment of $20 million.
Phillips was betting that the December election in South Africa would trigger a ZAR rally against the USD. But even though the ZAR soared to a two-year high a week before Christmas after the election, it still did not break through the 12.50 level needed to trigger the $20 million payout. In a few days, the option was set to expire.
Late Christmas night, Phillips instructed an employee at Nomura Holdings in Singapore to sell large quantities of USD in return for ZAR with the aim of pushing down the USD/ZAR exchange rate below 12.50.
Thereafter, $725 million worth of USD was sold in exchange for ZAR and the rate fell below 12.50, allowing Phillips to claim $20 million. Glen Point is said to have made around $16 million on the option trade.
Charges
Phillips, who is from the UK, has been charged with one count of conspiracy to commit commodities fraud, which comes with a maximum prison term of five years, and one count of commodities fraud violating Title 7, United States Code, Sections 9(1) and 13(a)(5), with a maximum prison term of 10 years.He is also charged with a count of wire fraud and conspiracy to commit wire fraud, each of which comes with a maximum prison term of 20 years.
In an interview with Bloomberg, Rosa Abrantes-Metz, an economist who co-heads The Brattle Group’s antitrust practice, pointed out that such type of misconduct tends to happen “more often than we would like to see.”
In his defense, Phillips could argue that he was not making illegal trades but only aggressive ones. “Proving market manipulation is so hard,” Abrantes-Metz said.
In the release, FBI Assistant Director Michael J. Driscoll said that the agency is “determined to root out” such types of fraud from the market to ensure 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,” he said.
