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Soros-Backed Fund’s Christmas Night Trading Frenzy Led to Arrest

·8 min read

(Bloomberg) --

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As the clock crept toward midnight on Christmas 2017, many London traders headed to bed with bellies full, but in South Africa, Glen Point Capital co-founder Neil Phillips was wide awake.

Phillips, 52, a finance veteran backed by billionaire George Soros, wanted to drive the exchange rate between the US dollar and the South African rand below 12.50 so he could make a $20 million wager succeed, according to a US indictment against him unveiled this week. Over a high-stakes hour, he tapped out instructions to an employee at Nomura Holdings Inc. in Singapore, one of the few global hubs where the sun was rising and traders were at their desks.

“My aim is to trade thru 50,” Phillips said at 12:09 a.m. Seven minutes later, he repeated: “need to get it thru 50.”

Soon, the employee at Nomura -- called Bank-3 in the indictment, but identified by people with knowledge of the matter -- had arranged so many trades on Phillips’s behalf that prosecutors said the transactions nudged the rate where he wanted it, allegedly manipulating one of the world’s most-traded emerging-market currencies. London-based Glen Point made millions of dollars in profit and later boasted to investors that bets on South Africa had helped the hedge fund post a record year of returns.

But the frantic session that Christmas night sparked alarm elsewhere at Nomura, according to people familiar with the situation. It ultimately led to Phillips’s arrest in Spain this week at the request of US authorities. Federal prosecutors in New York accused the well-connected money manager of multiple counts of fraud, sending shock waves across Wall Street’s macro-trading scene.

In the industry, the incident resurrected memories of how Wall Street firms rigged the $6.6 trillion-a-day currency market for years and raised questions about how the alleged trades went ahead in the first place.

“This type of conduct unfortunately happens more often than we would like to see,” said Rosa Abrantes-Metz, an economist who co-heads the Brattle Group’s antitrust practice and taught for more than a decade at New York University’s Stern School of Business. Still, she said, Phillips may be able to offer defenses, potentially arguing he was making aggressive but not illegal trades. “Proving market manipulation is so hard,” she said.

Phillips has yet to formally respond to the charges, and he and his lawyer, William Stellmach, didn’t reply to requests for comment. Simon Danaher, a spokesperson for Nomura in London, declined to comment. Authorities haven’t accused the bank of any wrongdoing.

While Glen Point allegedly made $16 million on the trades, Soros’s investment firm -- Soros Fund Management -- got $4 million, according to legal filings and people familiar with the matter. Phillips helped oversee money for the billionaire investor through a so-called managed account, and there’s no suggestion of any wrongdoing on Soros’s part. A representative for Soros declined to comment.

Rival hedge funds with links to Phillips quickly cut ties. Kirkoswald Asset Management put on leave several employees who used to work at Glen Point while Balyasny Asset Management let go some former Glen Point staff who had joined the firm recently, people with knowledge of the matter have said.

“This turn of events for such a large and prominent hedge fund is remarkable,” Mark Williams, a professor at Boston University and a former Federal Reserve bank examiner, said of Glen Point. Many aspects of the case “make it stand out in terms of egregiousness.”

Volatile Currency

The charges could be catastrophic for Phillips, who has spent decades at some of Wall Street’s biggest firms. He worked at Morgan Stanley and Lehman Brothers Holdings Inc. in the early 2000s before joining BlueBay Asset Management. He focused on so-called macro trading, in which investors try to profit from global economic trends by betting on interest rates and currencies, and went on to manage a $1.4 billion standalone macro hedge fund at the London-based firm.

Macro traders frequently focus on South Africa, one of continent’s biggest economies and a place where volatile politics and scandals can send prices swinging. The rand is the fifth-most traded emerging-market currency in the world, with average daily turnover on global markets of $72 billion in 2019, the latest year for which full data are available, according to the Bank for International Settlements. That’s on par with Russia’s ruble and more active than Brazil’s real and Turkey’s lira.

An example of that volatility occurred in 2008, when the asset-management arm of Investec Ltd. said that the South African inflation rate was overstated. That fueled a rally in the country’s bond market and prompted Phillips to wade into the debate, accusing his rival of trying to unfairly boost returns on their own positions.

“It really is scandalous,” Phillips told Bloomberg in a phone interview. “It’s incredibly sinister and designed to hit the market at a time when it was very vulnerable. It’s an abuse of their market position.”

BlueBay closed Phillips’s fund in 2014 when he left to launch his own venture amid what he called “ridiculously successful circumstances.” He founded Glen Point the following year with colleague Jonathan Fayman and they raised nearly $2 billion from investors including Soros. But the new fund struggled in 2016 and lost money, according to documents obtained by Bloomberg.

Seeking Rebound

South Africa presented an opportunity for a rebound in 2017 as the ruling African National Congress party geared up to pick a new leader. Phillips predicted the rand would rally significantly against the dollar as a result of the December election, which cast investor-friendly Cyril Ramaphosa against Nkosazana Dlamini-Zuma, the ex-wife of the country’s embattled president at the time, Jacob Zuma.

To make his bet, Phillips purchased a so-called FX option, a complex derivative. If the dollar fell below 12.50 rand by Jan. 2, 2018, the contract would pay out $20 million.

Ramaphosa was announced as the new leader of the ANC about a week before Christmas, setting him on course to be the nation’s next president. The rand soared to a two-year high -- yet it didn’t cross the 12.50 threshold that Phillips needed. His option, the prosecutors noted, was about to expire.

Late Christmas night, prosecutors wrote in the indictment, Phillips sent a flurry of messages to the bank: Sell dollars in return for rand until the rate falls below 12.50. “Need it to trade thru 50,” he repeated again at 12:25 a.m.

By 12:31 a.m., Phillips had sold $415 million and the rate was 12.505. “How much more u think to break 50,” he asked the Nomura employee, according to the indictment. “At least another 200,” came the response. At 12:44 a.m., with $725 million sold, the rate finally dropped below 12.50. Several minutes later, the rate was 12.4975.

“Perfect,” Phillips said.

The Glen Point Global Macro Fund gained 6% in December 2017, one of its strongest monthly performances, and contributed to a 22% return for the year, according to documents obtained by Bloomberg.

The hedge fund later touted its foresight to investors, the documents show.

“We had anticipated the potential for large swings in South African assets around the ANC electoral conference and, in particular, believed that the market had priced in too little risk of a Cyril Ramaphosa victory,” the fund wrote. “This judgment proved to be correct with the market subsequently coming to terms with the scope for a more positive policy dynamic than seen in South Africa for a long time.”

Back in London, the transactions were drawing attention inside Nomura. The size would be unusual even on a busy day and unheard of in the wee hours of Dec. 26, the people said. Traders there were surprised, and compliance officials began examining what happened, the people said.

Ultimately, the US brought a case, with officials vowing in a statement that they will track down manipulation of global financial markets no matter where it occurs.

“How utterly bizarre that US prosecutors are chasing a London-based hedge fund for currency manipulation in Singapore,” said Andrew Beer, founder of New York-based Dynamic Beta Investments. “The golden age of regulation may well be upon us.”

Glen Point would never repeat such a strong annual performance, the documents show. In December 2021, Phillips agreed to sell the hedge fund to Eisler Capital. Under the proposed transaction, Phillips would keep overseeing his old strategies and also manage money for Eisler. In a statement at the time, he said he was looking forward to “capitalizing on all the benefits of joining a larger business.”

But the deal fell apart in February. A spokesperson for Eisler Capital confirmed Phillips never joined the firm and declined further comment.

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