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The co-founder and chief investment officer of a London-based hedge fund has been accused of manipulation and fraud in the FX market. USAO-SDNY

Damian Williams, U.S. Attorney for the Southern District of New York, and Michael J. Driscoll, Assistant Director of the New York Branch of the Federal Bureau of Investigation (“FBI”), are the co-founders and chief executives of a UK-based hedge fund. Indictment indicting Neil Phillips, Director of Investments, for conspiracy to commit commodity fraud, conspiracy to commit wire fraud, commodity fraud, and wire fraud in connection with a scheme to deliberately defraud United States Dollar (“USD”) / South Africa Manipulating the Rand (“ZAR”) exchange rate to fraudulently trigger a $20 million payment under a barrier option agreement. Phillips was arrested in Spain earlier this week at the request of the United States.

U.S. Attorney Damian Williams said: Market manipulation is harmful in all its forms, and today’s indictment is being held by the United States District Court for the Southern District of New York, whether it occurs in the stock market, the foreign exchange market, or elsewhere in the financial system. Remind us to resolutely investigate and prosecute any illegal activity. “

FBI Deputy Director Michael J. Driscoll said: The FBI is determined to root out this type of fraud so the financial markets can maintain a level playing field. As shown today, the FBI seeks to find fraudsters anywhere in the world and bring them back to the United States to face the consequences of their actions in the federal criminal justice system. “

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

Hedge Fund-1 and FX Market Background

Phillips was always co-founder and co-chief investment officer of a UK-based hedge fund (“Hedge Fund 1”). Markets, Foreign Exchange (“FX”) Markets, Currencies and Commodity Products. Hedge Fund-1 has always been a commodity pool operator registered with the Commodity Futures Trading Commission (“CFTC”), and PHILLIPS himself was also registered with his CFTC.

The FX market is a global marketplace where participants trade currencies in pairs. In a currency pair, each currency is valued relative to the others, and the ratio representing the value of one currency to the other is called an “exchange rate” or “rate.” In FX “spot” trading, one party agrees to receive a particular currency in exchange for providing another currency at an agreed price and quantity.

$20 million one-touch option

In late October 2017, Hedge Fund-1 purchased a “one-touch” digital option on the USD/ZAR currency pair that expires on January 2, 2018. The option had a notional amount of $20 million and a barrier rate of 12.50. ZAR to USD (“$20 million one-touch option”). Under the terms of the $20 million one-touch option, if the USD/ZAR exchange rate fell below 12.50 at any time prior to January 2, 2018, Hedge Fund-1 would pay out $20 million. have the right to receive Hedge Fund-1 then allocates a portion of the $20 million notional value to its client (“Client Fund-1”), which, if the $20 million One-Touch Option is triggered, will result in Client Fund-1 1 was entitled to receive $4,340,000.

Other financial institutions were parties to the transaction. Hedge Fund-1 purchased a $20 million One Touch Option through a financial services firm (“Intermediary Firm-1”) that facilitates transactions on behalf of underlying clients. A subsidiary of a bank based in Manhattan, New York (“Bank-1”) owed him $20 million if the $20 million one-touch option was triggered. A bank based in Manhattan, New York (“Bank-2”) also acted as prime broker for Hedge Fund-1 in connection with the $20 million one-touch option.

Hedge Fund-1 and Bank-2 have entered into a letter agreement setting out the terms of the transaction. This letter agreement stipulates that Hedge Fund-1 will “act in a good faith and commercially It was stipulated to determine whether a occurred in a good faith and commercially reasonable manner;

Phillips intentionally manipulated USD/ZAR rates on Boxing Day 2017

On December 26, 2017 (Boxing Day), Phillips won $20 million in one-touch options set to expire in a few days without triggering. engaged in a scheme to deliberately and artificially manipulate the USD/ZAR rate to underperform. At 12.50, trigger a payout with a $20 million one-touch option. PHILLIPS attempted to bring the USD/ZAR exchange rate below his 12.50 by engaging in FX spot trading that forced hundreds of millions of US dollars to be exchanged into his ZAR. Phillips engaged in this USD/ZAR FX spot trade for the express purpose of artificially pushing his USD/ZAR rate below his 12.50. On December 26, 2017, in the hours following the completion of his USD/ZAR FX spot trade as directed by PHILLIPS, the USD/ZAR rate rose again, returning to levels above the 12.50 barrier and falling below that rate. There was not. rest of the day.

In particular, during the less than one hour period between just before midnight London time on December 25, 2017 (Christmas Day) and approximately 12:45 am London time on December 26, 2017 (Boxing Day): Philips has personally agreed that an employee (“CC-1”) of a bank in Singapore (“Bank-3”) will pay a total of approximately US$725 million on behalf of Hedge Fund-1 in exchange for approximately 9,070,902,750 ZAR. Sell. During that hour or so, PHILLIPS significantly dropped his USD/ZAR rate through trading to just below his 12.50. As soon as Phillips achieved his objective and Phillips’ clever spot trading activity pushed his USD/ZAR rate below his 12.50, Phillips immediately instructed him to stop trading his CC-1. PHILLIPS provided trading instructions to his CC-1 through his messages on Bloomberg chat while PHILLIPS was in South Africa and CC-1 was in Singapore. In these Bloomberg chat messages, PHILLIPS explicitly instructed CC-1 to continue selling until the USD/ZAR rate fell below 12.50, and PHILLIPS directed these trades. We explicitly said it was to push it below 12.50. “My goal is for him to trade up to 50.”[n]Must trade up to 50. 4990 is enough” and “[g]go through it. When PHILLIPS was informed by CC-1 that he USD/ZAR traded below 12.50, PHILLIPS immediately instructed her CC-1 to ‘stop’ trading and ‘print ” demanded proof.

PHILLIPS fraudulently triggers $20 million one-touch option

Minutes after PHILLIPS artificially lowered the USD/ZAR exchange rate below 12.50 through a manipulative trade, PHILLIPS told another employee at Hedge Fund-1 (“CC-2”) that he had received a $20 million I instructed Brokerage Company-1 to notify me that there was a one-touch option. Triggered. Following Phillips’ instructions, CC-2 contacted an employee of Brokerage Company-1 to confirm that his $20 million One Touch option had been triggered. In doing so, we left out the fact that the trigger event – the USD/ZAR rate fell below. 12.50 – Occurred as a result of PHILLIPS manipulation of his USD/ZAR exchange rate. In addition, Bank 2, acting as prime broker for Hedge Fund 1 in connection with the $20 million One Touch Option, with which Hedge Fund 1 entered into the relevant letter of intent to administer the transaction, requires confirmation from both the executing broker and It was made. We know from Hedge Fund-1 that the $20 million one-touch option has indeed been triggered. In this regard, on or about December 27, 2017, an employee of Hedge Fund 1 notified her Bank-2 that:[t]He fell below the option level of 12.50 yesterday,” and attempted to process a payout in connection with triggering a $20 million one-touch option. Similarly, hedge fund 1’s statement to bank 2 that the $20 million one-touch option was triggered was that the triggering event (the USD/ZAR exchange rate falling below his 12.50) occurred as a result of currency manipulation. omitting the fact that USD/ZAR exchange rate 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 as a result of PHILLIPS’ fraudulent triggering of the $20 million One Touch option.

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UK’s 52-year-old PHILLIPS has been charged with one count of conspiracy to commit fraud and faces a maximum sentence of five years in prison. Her one count of merchandise fraud in violation of Title 7, United States Code, Sections 9(1) and 13(a)(5). At most she is sentenced to 10 years in prison. One count of conspiracy to commit wire fraud and one count of wire fraud carry a maximum penalty of 20 years in prison each.

Statutory maximum penalties are set by Congress, and defendants’ sentences are determined by judges, so they are provided here for informational purposes only.

Williams praised the FBI’s investigative efforts. He also thanked the Justice Department’s Office of International Affairs and Spanish authorities.

This case is being handled by the Secretariat’s Securities and Commodity Fraud Task Force. Assistant U.S. Attorney Noah Solowieczyk is in charge of the prosecution.

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


[1] As the preamble implies, the full text of the indictment, and the description of the indictment set forth herein, constitutes allegations only, and all facts set forth should be treated as allegations.

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