The Commodity Futures Trading Commission today filed a civil enforcement action in the U.S. District Court for the Southern District of New York against Glen Point Capital Advisors LP and Glen Point Capital LLP (collectively, Glen Point Capital), two CFTC-registered commodity pool operators, and their Co-Founder and Co-Chief Investment Officer, Neil Phillips, charging them with engaging in a deceptive and manipulative scheme to illegally trigger payouts on two large binary option contracts. Additionally, the defendants are charged with failing to supervise the trading activities of their officers, employees, and agents.
In its continuing litigation, the CFTC seeks, among other relief, civil monetary penalties, disgorgement of any ill-gotten gains, permanent trading and registration bans, and a permanent injunction against further violations of the Commodity Exchange Act (CEA), as charged.
“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.
Case Background
The complaint alleges that the option contracts at issue, which are swaps under the CEA, were tied to the U.S. dollar (USD) to South African rand (ZAR) exchange rate. Under their terms, if the USD/ZAR exchange rate fell below certain levels at any point during the life of the contracts, the contracts would pay out predetermined amounts totaling $30 million to two commodity pools under the joint management of Glen Point Capital.
On two occasions, in late December 2017, during a period of low market liquidity (around Christmas time), Phillips engaged in a scheme to intentionally and artificially drive down the USD/ZAR exchange rate to levels that would trigger payouts on the option contracts. At that time, Phillips knew that only a few days remained for the USD/ZAR exchange rate to hit the predetermined amounts or else the contracts would expire, rendering them worthless. 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.
As further alleged, Phillips expressed his manipulative intent in messages he sent to the bank that executed the spot trades. For example, during the first set of trades at issue, Phillips explicitly told a salesperson at the bank his objective was to trade through the rate of 12.50 rand per dollar — the barrier level that would trigger one of the option contracts — and Phillips repeatedly asked the salesperson how much he needed to sell in order to move the market below that level. As soon as Phillips caused the USD/ZAR rate to move below that level, he immediately stopped trading and asked the salesperson to send him a system printout of the final transaction as proof that the USD/ZAR rate had breached the 12.50 rand per dollar barrier level.
The complaint also alleges that while Glen Point Capital purported to have a compliance and supervision program in effect during the relevant period, and while Phillips’ trading activity consisted of concentrated transactions that were executed in short time spans and led to changes in the USD/ZAR currency pair spot price that should have drawn the firm’s attention, the firm’s program either failed to detect or ignored this activity.
Related Criminal Action
On September 1, the U.S. Attorney’s Office for the Southern District of New York announced the unsealing of an indictment against Phillips in the same court alleging conduct similar to that alleged in the CFTC’s complaint.
The CFTC appreciates the assistance of the U.S. Attorney’s Office for the Southern District of New York and the Monetary Authority of Singapore.
The Division of Enforcement and CFTC staff members responsible for this case are Julia C. Colarusso, Dmitriy Vilenskiy, Lauren E. Bennett, Jonah E. McCarthy, Jennifer Blakley, Mary Lutz, Yusuf Capar, Hillary Van Tassel, Catherine Brescia, Chrystal Gonnella, A. Daniel Ullman II, and Paul G. Hayeck.
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Misconduct in the Swaps Markets
The CFTC oversees the swaps markets, and fraud or manipulation involving swaps violates the CEA and CFTC regulations.
Market participants can report suspicious activities or information, such as possible violations of commodity trading laws, to the CFTC Division of Enforcement via a toll-free hotline 866-FON-CFTC (866-366-2382), file a tip or complaint online, or contact the Whistleblower Office. Whistleblowers are eligible to receive between 10 and 30 percent of the monetary sanctions collected paid from the CFTC Customer Protection Fund financed through monetary sanctions paid to the CFTC by violators of the CEA.
