Damian Williams, United States Attorney for the Southern District of New York, and Michael J. Driscoll, Deputy Director in Charge of the Federal Bureau of Investigation’s (“FBI”) New York Field Office, announced the unsealing of an indictment charging NEIL PHILLIPS, the co-founder and chief investment officer of a UK-based hedge fund, with conspiracy to commit commodity fraud, conspiracy to commit fraud by commodity fraud and wire fraud in a scheme to artificially manipulate the exchange rate between the United States dollar (“USD”) and the South African rand (“ZAR”) to trigger fraudulently paid $20 million under a barrier options contract. PHILLIPS was arrested in Spain earlier this week at the request of the United States.
US lawyer Damian Williams said: “As alleged, Neil Phillips – the co-founder and chief investment officer of a leading UK hedge fund – manipulated the foreign exchange market in order to illegally obtain millions of dollars from payments for his hedge fund under an options contract Market manipulation is pernicious in any form and today’s charges serve as 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 Deputy Director Michael J. Driscoll said: “As alleged, Mr. Phillips maliciously manipulated global markets to defraud financial institutions for illicit purposes. The FBI is determined to eradicate these types of frauds so that the financial markets remain on a level playing field. As reported today, the FBI will find fraudulent actors wherever they are in the world and seek 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:
Context of the Hedge Fund-1 and the foreign exchange markets
At all material times, PHILLIPS was Co-Founder and Co-Chief Investment Officer of a UK-based hedge fund (“Hedge Fund-1”), which was a global “macro” fund focused on macro trends and emerging markets. markets, foreign exchange (“FX”) markets and monetary and commodity products. Hedge Fund-1 was at all times a commodity pool operator registered with the Commodity Futures Trading Commission (the “CFTC”) and PHILLIPS itself was also registered with the CFTC.
The foreign exchange market is a global market in which 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”. “Spot” FX transactions involve a party agreeing to receive a particular currency in exchange for 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 for the USD/ZAR currency pair which was to expire on January 2, 2018. The option had a notional value of $20 million and a barrier rate of 12.50. ZAR to USD (the “$20 Million One Touch Option”). Under the terms of the $20 million One Touch option, if the USD/ZAR exchange rate fell below the rate of 12.50 at any time prior to January 2, 2018, Hedge Fund-1 would be entitled to a payment of $20 million. Hedge Fund-1 subsequently allocated a portion of the notional value of $20 million to a client (“Client Fund-1”), thereby allowing Client Fund-1 to receive $4,340,000 in the event that the $20 million One Touch option was triggered.
Other financial institutions participated in the transaction: Hedge Fund-1 purchased the One Touch option for $20 million through a financial services company (“middle-1 company”) that facilitates transactions on behalf of underlying clients; a subsidiary of a bank headquartered in Manhattan, New York (“Bank-1”) was obligated to pay the $20 million upon triggering of the $20 million One Touch option; and a Manhattan, New York-based bank (“Bank-2”) acted as prime broker for Hedge Fund-1 in the $20 million One Touch option.
Hedge Fund-1 and Bank-2 have entered into a letter of agreement setting out the terms and conditions of the transaction. This letter of 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 has occurred in good faith and in a commercially reasonable manner.
PHILLIPS intentionally manipulates the USD/ZAR rate on Boxing Day 2017
With the $20 million One Touch option set to expire in a few days without being triggered, on December 26, 2017 (Boxing Day), PHILLIPS engaged in a scheme to intentionally and artificially manipulate the USD/ZAR rate to make lower the rate. 12.50 and trigger payment under the $20 million One Touch option. PHILLIPS caused and sought to cause the USD/ZAR exchange rate to fall below 12.50 by engaging in foreign exchange spot trading in which it caused hundreds of millions of USD to be exchanged for ZAR. PHILLIPS entered into this USD/ZAR FX spot trade for the express purpose of artificially driving the USD/ZAR rate below 12.50. On December 26, 2017, within hours of the completion of the PHILLIPS-led 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 rest of the day.
In particular, during the period of less than one hour between shortly before midnight, London time, December 25, 2017 (Christmas Day) and approximately 12:45 a.m., London time, December 26, 2017 (Boxing Day), PHILLIPS personally directed a Singapore-employee (“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 roughly one-hour period, PHILLIPS, through its trading, caused the USD/ZAR rate to drop significantly until it fell to just below 12.50. As soon as PHILLIPS reached its target and the USD/ZAR rate fell below 12.50 due to PHILLIPS’ manipulative spot trading activity, PHILLIPS immediately ordered CC-1 to cease trading. PHILLIPS provided trading instructions to CC-1 via Bloomberg chat messages while PHILLIPS was located in South Africa and CC-1 was located in Singapore. In these Bloomberg chat messages, PHILLIPS explicitly instructed CC-1 to continue selling until the USD/ZAR rate falls below 12.50 and PHILLIPS expressly stated that PHILLIPS’ objective in directing these trades was to push the USD/ZAR rate below 12.50 by stating, among other things, “my goal is to trade down to 50”, “[n]need it to trade up to 50. 4990 is fine” and “[g]put it through. Once PHILLIPS was informed by CC-1 that USD/ZAR had traded below 12.50, PHILLIPS immediately ordered CC-1 to “stop” trading and requested proof “of the impression”.
PHILLIPS causes fraudulent triggering of $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 asked another employee of Hedge Fund-1 (“CC-2”) to inform Intermediary-1 that the $20 million One Touch option had been triggered. As directed by PHILLIPS, CC-2 contacted an employee of Intermediate-1 to confirm that the $20 million One Touch option had been triggered and in doing so omitted the fact that the trigger event – the USD/ZAR rate falling below 12.50 – had occurred following the manipulation of the USD/ZAR exchange rate by PHILLIPS. In addition, Bank-2, which served as Hedge Fund-1’s prime broker under the $20 million One Touch Option and with which Hedge Fund-1 had signed the relevant Letter of Agreement governing the transaction, demanded confirmation from the executing broker and Hedge Fund-1 that the $20 million One Touch option had in fact been triggered. In this regard, on or about December 27, 2017, an employee of Hedge Fund-1 notified Bank-2 that “[t]the lower option level of 12.50 was reached yesterday” and sought to process the payout in connection with the triggering of the $20 million One Touch option. This representation by Hedge Fund-1 to Bank-2 that the $20 million One Touch option had been triggered also omitted the fact that the triggering event – the USD/ZAR exchange rate falling below 12.50 – occurred as a result of the manipulation of the USD/ZAR exchange rate by PHILLIPS.
Following the fraudulent triggering of the $20 million One Touch option by PHILLIPS, Hedge Fund-1 eventually received a wire transfer of $15,660,000 and Client Fund-1 received a wire transfer of $4,340,000 .
* * *
PHILLIPS, 52, from the UK, is charged with one count of conspiracy to commit goods fraud, which carries a maximum sentence of five years in prison; one count of commodity fraud, violation of United States Code Title 7, Sections 9(1) and 13(a)(5), which carries a maximum penalty of 10 years in prison; and one count of conspiracy to commit wire fraud and one count of wire fraud, each carrying a maximum sentence of 20 years in prison.
The maximum legal penalties are prescribed by Congress and are provided here for informational purposes only, as any sentencing of the accused will be determined by a judge.
Mr Williams praised the FBI’s investigative work. He also thanked the International Affairs Office of the Ministry of Justice, as well as the Spanish authorities. Mr. Williams also thanked the Commodity Futures Trading Commission for its cooperation and assistance in this investigation.
This matter is being handled by the Bureau’s Securities and Commodities Fraud Task Force. Assistant United States Attorney Noah Solowiejczyk is in charge of the prosecution.
The allegations contained in the indictment are only accusations and the accused is presumed innocent until proven guilty.
 As the introductory sentence indicates, the entire text of the Indictment and the description of the Indictment set forth therein are allegations only, and each fact described is to be treated as an allegation. .
Co-founder and chief investment officer of a London-based hedge fund accused of manipulation and fraud in the foreign exchange market