The Business Times

Hedge fund co-founder Neil Phillips charged with market manipulation

Published Fri, Sep 2, 2022 · 09:19 AM

THE arrest of Glen Point Capital co-founder Neil Phillips for alleged foreign-exchange market manipulation threatened to ripple across the hedge fund industry as another firm suspended staffers who previously worked with him.

Phillips, 52, was arrested in Spain on a request from the US earlier this week, federal prosecutors in New York said on Thursday (Sep 1) in a statement. Bloomberg News subsequently reported that Kirkoswald Asset Management put on leave several employees who used to work at London-based Glen Point.

A person familiar with the matter said Kirkoswald was awaiting more information and stressed that the firm had no reason to believe the employees were involved in the alleged market manipulation. But similar caution may emerge elsewhere on Wall Street and within the Square Mile, where Phillips was associated with some of the biggest names in the hedge fund universe.

Phillips was charged with conspiring to manipulate the US dollar-South African rand exchange rate in late 2017. The indictment, which was returned in March but previously sealed, describes at least 2 co-conspirators, raising the possibility of charges against more people.

William J Stellmach, a lawyer for Phillips, didn’t immediately respond to a phone call and an email seeking comment on the charges.

Soros backing

The alleged market manipulation came roughly 2 years after Phillips started Glen Point with his former BlueBay Asset Management colleague Jonathan Fayman. The pair raised nearly US$2 billion from investors including George Soros.

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Glen Point was set to be acquired in December by Edward Eisler’s Eisler Capital, which was also founded in London in 2015 and similarly focused on macro trading. But the deal fell apart in February because of a disagreement on the level of risk Glen Point’s fund could take. Eisler, onetime co-head of global securities at Goldman Sachs Group, has been expanding into other strategies in a bid to compete with industry giants such as Millennium Management and Citadel for capital and talent.

A spokesperson for Eisler Capital confirmed Phillips never joined the firm and declined further comment.

US regulators have been cracking down on market manipulation since the financial crisis more than a decade ago. Dozens of banks and traders have been accused of rigging markets including interest rates and precious metals, and even lying to customers about the prices of asset-backed securities.

Option trigger

According to prosecutors, Phillips’s hedge fund bought a digital option for the dollar-rand currency pair in late October 2017 that was set to expire on Jan 2, 2018. The option had a notional value of US$20 million and a barrier rate of 12.50 rand to the dollar, entitling the fund to a payment in that amount if the rate went below the barrier before the expiration date.

With the option set to expire, Phillips began making spot trades in an effort to push the exchange rate lower late on Christmas Day, while directing a Singapore-based employee of an unidentified bank to sell US$725 million in exchange for more than 9 billion rand, according to prosecutors. That pushed the exchange rate below the barrier, triggering the US$20 million option. Phillips collected more than US$15.6 million from the deal and also allocated US$4.34 million to an unidentified client.

Other financial institutions were parties to the transaction, prosecutors said, including a bank headquartered in Manhattan that paid the US$20 million option; another Manhattan-based bank that served as the fund’s prime broker; and a financial services firm that facilitated the purchase of the option. None of the firms were identified by the government, but Glen Point identified JPMorgan Securities LLC as its prime broker in a filing with the US Securities and Exchange Commission.

New money

Phillips joined BlueBay, owned by Royal Bank of Canada, in 2005 as a money manager. He started managing a macro strategy within the firm’s multi-strategy fund in 2007 and went on manage the firm’s standalone macro hedge fund 2 years later. BlueBay closed the US$1.4 billion macro fund after Phillips and Fayman left in November 2014 to found Glen Point.

The firm also enjoyed a high profile because it was among a small number of hedge funds to raise new money in 2016 when investors were pulling billions from the industry, according to research firm eVestment.

Phillips, who is currently in custody in Spain pending potential extradition, faces as much as 20 years in prison on the most serious charges, prosecutors said. BLOOMBERG

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