The Commodity Futures Trading Commission (CFTC) today filed a civil enforcement action in the New York Southern District Court against Glen Point Capital Advisors LP and Glen Point Capital LLP, two CFTC-registered commodity pool operators, and their Co-Founder and Co-Chief Investment Officer, Neil Phillips.

The regulator charged the defendants 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.

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.

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.