London-based hedge fund co-founder and chief investment officer accused of forex market manipulation and fraud | USAO-SDNY

Damien Williams, United States Attorney for the Southern District of New York, and Michael J. Driscoll, Assistant Director-in-Charge of the New York Office of the Federal Bureau of Investigation (“FBI”) announced the unsealing of an indictment charging NEIL PHILLIPS, co-founder and chief investment officer of a UK-based hedge fund, with conspiracy to commit fraud with commodities, conspiracy to commit fraud, commodity fraud, and fraud in connection with a scheme to artificially manipulate the United States dollar (“USD”)/South African rand (“ZAR”) exchange rate to trigger a fraudulent payment of $20 million under a barrier options contract. PHILLIPS was arrested in Spain earlier this week at the request of the United States.

US Attorney Damien Williams said: “Neil Phillips – the co-founder and chief investment officer of a prominent UK hedge fund – allegedly manipulated the foreign exchange market to illegally obtain millions of dollars in payments for his hedge fund under an options contract. Market manipulation is pernicious in all its forms, and today’s charges are a reminder that the Southern District of New York will vigorously investigate and prosecute such activity, whether it occurs in the stock market, the foreign exchange market or elsewhere in the financial system.

FBI Assistant Director Michael J. Driscoll said: “Mr Phillips is alleged to have maliciously manipulated global markets to defraud financial institutions for illegal profit. The FBI is determined to root out these types of fraud so that financial markets remain on a level playing field. As demonstrated today, the FBI will track down crooks, no matter where they are in the world, and try to bring them back to the United States to face the consequences of their actions in our federal criminal justice system.

As alleged in the indictment unsealed in Manhattan federal court:[1]

History of hedge fund-1 and the foreign exchange markets

At all relevant times, PHILLIPS is a co-founder and co-investment director of a UK-based hedge fund (“Hedge Fund-1”) which is a global “macro” fund focused on macroeconomic trends and emerging markets, foreign exchange markets (“FX “) and currency and commodity products. Hedge Fund-1 was at all relevant times a registered commodity pool operator with the Commodity Futures Trading Commission (“CFTC”) and PHILLIPS itself was also registered with the CFTC.

The FX market is a global market where participants trade currencies in pairs. In a currency pair, each currency is valued against the other and the ratio that expresses the value of one currency against the other is called the “exchange rate” or “rate”. FX spot transactions involve one party agreeing to receive a specified currency in exchange for the delivery of a different currency, at an agreed price and quantity.

The $20 million one-touch option

At the end of October 2017, Hedge Fund-1 purchased a one-touch digital option on the USD/ZAR currency pair, due to expire on January 2, 2018. The option had a notional value of $20 million and a strike rate of 12, 50 ZAR in USD (“The $20 Million One Touch Option”). Under the terms of the $20 million one-touch option, if the USD/ZAR exchange rate falls below 12.50 at any time prior to January 2, 2018, Hedge Fund-1 will be entitled to a payment of $20 million. Hedge Fund-1 subsequently distributed a portion of the Notional Value of $20 million to Client (“Client Fund-1”), thereby entitling Client Fund-1 to receive $4,340,000 in the event that the $20 million one-touch option is exercised triggered.

Other financial institutions were a party to the transaction: Hedge Fund-1 purchased the $20 million one-touch option through a financial services firm (“Intermediate Firm-1”) that facilitates transactions on behalf of the underlying clients; a subsidiary of a bank headquartered in Manhattan, New York (“Bank-1”) was obligated to pay $20 million in the event that the $20 million one-tap option was exercised; and a bank headquartered in Manhattan, New York (“Bank-2”) acted as prime broker for Hedge Fund-1 in connection with the $20 million one-touch option.

Hedge Fund-1 and Bank-2 entered into a letter stating the terms of the transaction. This written agreement provided that Hedge Fund-1 would “act in good faith and in a commercially reasonable manner” as the “Calculation Agent” in connection with the $20 million one-touch option and that Hedge Fund-1 would determine whether a barrier event occurred in good faith and in a commercially reasonable manner.

PHILLIPS deliberately manipulated USD/ZAR on Boxing Day 2017

As the $20 million one-touch option is set to expire in a few days without being exercised, on December 26, 2017 (Boxing Day), PHILLIPS engaged in a scheme to deliberately and artificially manipulate the USD/ZAR exchange rate, to to drop it below 12.50 and trigger a call on the $20 million option with one touch. PHILLIPS caused and attempted to cause the USD/ZAR exchange rate to fall below 12.50 by engaging in currency spot transactions in which he caused hundreds of millions of USD to be exchanged for ZAR. PHILLIPS participated in this USD/ZAR FX spot trade with the express purpose of artificially driving the USD/ZAR rate below 12.50. On December 26, 2017, in the hours following the close of the PHILLIPS-directed USD/ZAR FX spot trade, the USD/ZAR rate rose again and returned to levels above the 12.50 barrier and did not fall below that rate for the remainder of the day.

Specifically, in the interval of less than an hour between shortly before midnight London time on 25 December 2017 (Christmas) and approximately 12.45pm London time on 26 December 2017 (Boxing Day), PHILLIPS personally directed Singapore based officer (“CC-1”) of a bank (“Bank-3”) to sell, on behalf of Hedge Fund-1, a total of approximately US$725 million in exchange for approximately ZAR 9,070,902,750. During this approximately one-hour period, PHILLIPS, through his trade, caused a significant drop in the USD/ZAR rate, until the rate fell just below 12.50. As soon as PHILLIPS achieved its target and USD/ZAR fell below 12.50 due to PHILLIPS’ spot trading manipulative activity, PHILLIPS immediately ordered CC-1 to cease trading. PHILLIPS provided trading instructions to CC-1 via Bloomberg chat messages while PHILLIPS was in South Africa and while CC-1 was in Singapore. In these Bloomberg chat messages, PHILLIPS specifically instructed CC-1 to continue selling until the USD/ZAR rate fell below 12.50 and PHILLIPS specifically stated that PHILLIPS’ objective in placing these trades was to bring the USD/ZAR rate below 12.50 stating, among other things, “my goal is to trade to 50,” “[n]score it to trade up to 50. 4990 is good” and “[g]spend it. After PHILLIPS was informed by CC-1 that USD/ZAR was trading below 12.50, PHILLIPS immediately instructed CC-1 to “halt” the trade and requested proof “of the footprint”.

PHILLIPS causes the fraudulent trigger of the $20 million one-touch option

Minutes after PHILLIPS artificially caused the USD/ZAR exchange rate to fall below 12.50 through its manipulative trading, PHILLIPS instructed another employee of Hedge Fund-1 (“CC-2”) to notify Intermediary Firm-1 that the $20 million option with one touch it is activated. Pursuant to PHILLIPS’ directive, CC-2 contacted an employee of Intermediary Firm-1 to confirm that the $20 million one-touch option had been triggered and thus missed the fact that the triggering event – the USD/ZAR exchange rate falls below 12.50 – occurred as a result of manipulation of the USD/ZAR exchange rate by PHILLIPS. Additionally, Bank-2, which served as Hedge Fund-1’s prime broker in connection with the $20 million one-touch option and with which Hedge Fund-1 had signed the corresponding written agreement governing the transaction, required confirmation from both the executing broker and and from Hedge Fund-1 that the $20 million one-touch option was actually triggered. Accordingly, on or about December 27, 2017, an employee of Hedge Fund-1 notified Bank-2 that “[t]he below the option level of 12.50 was reached yesterday” and attempted to process a payment in connection with the trigger of the $20 million one-touch option. This representation by Hedge Fund-1 to Bank-2 that the $20 million one-touch option was triggered also misses the fact that the triggering event – ​​the fall of the USD/ZAR exchange rate below 12.50 – occurred as a result of the manipulation on USD/ZAR exchange rate from PHILLIPS.

As a result of the fraudulent triggering of the $20 million one-touch option by PHILLIPS, Hedge Fund-1 ultimately received a wire transfer of $15,660,000 and Client Fund-1 received a wire transfer of $4,340,000.

* * *

PHILLIPS, 52, of the United Kingdom, is charged with one count of conspiracy to commit goods fraud, which carries a maximum sentence of five years in prison; one count of goods fraud in violation of Title 7, United States Code Sections 9(1) and 13(a)(5), which carries a maximum sentence of 10 years in prison; and one count of conspiracy to commit wire fraud and one count of wire fraud, each of which carries a maximum sentence of 20 years in prison.

Statutory maximum sentences are prescribed by Congress and are provided here for informational purposes only, as each defendant’s sentence will be determined by a judge.

Mr. Williams praised the investigative work of the FBI. He also thanked the Office of International Relations of the Ministry of Justice, as well as the authorities in Spain. Mr. Williams also thanked the Commodity Futures Trading Commission for their cooperation and assistance in this investigation.

This case is being handled by the Office’s Securities and Commodity Fraud Task Force. Assistant US Attorney Noah Soloveitchik is in charge of the prosecution.

The allegations in the indictment are mere accusations and the defendant is presumed innocent unless and until proven guilty.


[1] As the introductory phrase indicates, the entire text of the indictment and the description of the indictment set forth herein are allegations only, and each fact described must be treated as an allegation.

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