UK hedge fund manipulated FX market to trigger $20m payout

The regulator accuses Phillips, who is also chief investment officer at Glen Point, of manipulating the US dollar/ South African rand exchange rate to trigger a decent payment under two large binary option contracts his fund had bought.

The complaint describes at least two co-conspirators, raising the possibility of charges against more people. US federal prosecutors said that under the terms of the option contracts at issue, if the USD/ZAR exchange rate fell below certain levels, the contracts would pay out $30 million to two commodity pools under the joint management of Glen Point Capital.

Phillips and his London-based hedge fund, which was previously backed by George Soros, is charged with conspiracy to commit commodities and wire fraud, commodities fraud, and wire fraud.

The indictment occurred around Christmas time in late December 2017 when only a few days were left before a “one touch” digital option for USD/ZAR was set to expire worthless. Phillips and his staffers engaged in a scheme to artificially drive down the exchange rate to a barrier rate of 12.5, which triggered payouts on the option contracts.

As alleged, Phillips engaged an employee of Nomura bank in to aggressively sell USD/ZAR through the level, thus triggering the payout. The CFTC says that Phillips sold around $725 million USD/ZAR in just over an hour around the Singapore open.

“Rather than allowing free market forces to determine whether the USD/ZAR exchange rate would breach the predetermined amounts set by the contracts before they expired, Phillips orchestrated the trading of massive amounts of the USD/ZAR currency pair in the foreign exchange spot market for the express purpose of pushing the exchange rate down to the exact levels he needed to trigger the contracts. Phillips’ scheme was successful and directly resulted in $30 million in payouts for the pools under Glen Point Capital’s management,” the release further states.

The CFTC has asked the court to provide full restitution to defrauded participants, disgorgement of ill-gotten gains and the payment of appropriate civil monetary penalties. In addition to fiscal penalties, it also asked for the imposition of permanent registration, trading bans and a permanent injunction from future violations of federal commodities laws.

The regulator added that it is determined to root out these types of frauds so financial markets remain a level playing field.

“Manipulative and deceptive conduct undertaken in connection with swaps harms market integrity and market participants, and we will take action to hold those who commit this type of misconduct accountable,” said Acting Director of Enforcement Gretchen Lowe.