If the US department of justice (DoJ) is to be believed — and who wouldn’t believe it — it seems surprisingly easy to manipulate the foreign exchange market. Or it’s easy enough at least if you’re targeting the rand, happen to have $725m on hand to direct to the exercise and have ready access to one of Bloomberg’s chat rooms.
Then again, the manipulation may only last minutes or even seconds. So perhaps it’s not that easy. But in the DoJ’s latest case, this was sufficient time for an alleged forex manipulator to meet his objectives and score a $20m profit.
Getting away with it, of course, is another thing.
SA-born Neil Phillips is the latest in a disturbingly long list of individuals nabbed by the DoJ for allegedly manipulating the foreign exchange market, and the dollar/rand rate in particular. He was arrested in Spain in late August for allegedly manipulating the $/R rate just after midnight on December 25 2017.
According to Damian Williams, the US attorney for the southern district of New York, “Phillips, the co-founder and chief investment officer of a prominent UK hedge fund, [allegedly] manipulated the [forex] market in order to unlawfully obtain millions of dollars in payment for his hedge fund under an options contract”.
In layman’s language, what appears to have happened is that in October 2017, Phillips took a bet that the $/R exchange rate would dip below R12.50 (to the dollar) before January 2 2018. If he was right, he would win $20m. (There’s no indication of what he paid for the bet.)
By Christmas day there was no sign of the rand breaking the 12.50 level so, according to the DoJ, Phillips took matters into his own hands. He “engaged in a scheme to intentionally and artificially manipulate the $/R rate”, the department alleges, driving it below R12.50 to “trigger” payment of the $20m.
Amazingly, with access to a Bloomberg chat room, this took less than an hour. From just before midnight on December 25 until 0.45am on December 26, Phillips personally directed a Singapore-based employee of a bank to sell, on behalf of Phillips’s hedge fund, about $725m in exchange for R9bn.
During that relatively brief period, “Phillips caused the $/R to fall substantially until the rate went just below 12.50”. As soon as he had achieved his objective, he told the Singapore-based trader to stop trading.
The FBI will find fraudulent actors, no matter where in the world they are located, and seek to bring them back to the US to face the consequences of their actions
— Michael Driscoll
Many of the details are similar to several other cases the DoJ, with the backing of the FBI, has brought against fraudulent activity in the financial markets. It’s part of a campaign that has moved up several notches as a result of the public outrage around the global financial crisis, which seemed to leave executives of the financial community largely unscathed.
The details paint a picture of a dated clubby network system at play. In its case against rand manipulators, SA’s Competition Commission describes the “Old Gits” chat room as the longest-running and most prolific of all the rand-implicated chat rooms on the Bloomberg platform. The “ZAR chat room” is also an important entity. In this clubby world, the traders prankishly refer to themselves as “the cartel” or “the mafia”.
But it seems the US authorities are getting serious. At the time of Phillips’s arrest in Spain, Michael Driscoll, FBI assistant director in charge of the New York field office, warned: “The FBI will find fraudulent actors, no matter where in the world they are located, and seek to bring them back to the US to face the consequences of their actions.”
From the DoJ’s telling, this certainly looks like a slam-dunk case. But not everyone is sure the US government has enough to win. Even the DoJ notes that “the allegations in the indictment are merely accusations, and the defendant is presumed innocent unless and until proven guilty”.
A leading forex trader tells the FM that because of the nature of trading, the DoJ could struggle to prove the case. “It certainly looks like manipulation, but Phillips could argue he was merely defending a position he was holding,” says the trader, adding that large players across the globe, including central banks, often spend huge amounts of money defending their positions and can do this legitimately.
However, the timing — midnight over Christmas — and trading during the Asian session should have set off alarm bells, the trader says.
The difficulty of proving a case is evident in the limited number of prosecutions that end up in court. Even the well-resourced US and UK authorities have preferred to settle or issue administrative decisions rather than take their chances in open court. Settlements usually come with hefty multibillion-dollar fines. This may be the cheaper option for global banks wanting to avoid the potentially expensive class action claims by clients that would inevitably follow admissions of guilt.
So, where does this leave our own competition authorities, which have been bravely, and increasingly hopelessly, battling their own forex case?
Phillips’s arrest might encourage the Competition Commission in its seven-year battle to prosecute most of SA’s major banks for rigging the currency market. However, it’s unlikely to do much to expedite matters. The commission’s case is already heavily reliant on evidence collected by the DoJ, and though that’s been helpful, its use is limited.
“There is overwhelming evidence that the Old Gits chat room and the ZAR chat room were used by multiple competing banks to engage in conduct implementing the terms and furthering the objectives of the conspiracy [to manipulate the rand exchange rate],” the commission tells the Competition Tribunal in its most recent referral document.
The commission then refers to several members of these chat rooms who have entered into plea agreements or been found guilty of contraventions of various laws.
The highest-profile of these is forex trader Jason Katz, who entered into a plea agreement in 2017 in relation to fixing prices for Central and East European, Middle Eastern and African emerging-market currencies, mainly the rand, between January 2007 and at least July 2013.
Katz, a former Barclays and BNP Paribas trader, provided damning evidence about discussions in the Old Gits and ZAR chat rooms. Other members of these chat rooms were Standard Chartered employees James Mullaney, Matthew Sweeney, Bernard Basaric and Patrick McInerney. All four have entered into plea agreements with the US authorities.
Though the US department of justice’s evidence will be useful for the Competition Commission, it may be of limited application
— What it means:
Much of the commission’s case against the 23 banks is based on the assumption that their traders were members of one or both chat rooms, and were therefore involved in a conspiracy against the rand.
In anticipation of criticism that its charge lacks the necessary specific details, the commission refers to European competition law, which holds that the anticompetitive agreement need not be formal or in writing.
“It is sufficient that ‘the undertakings in question should have expressed their joint intention to conduct themselves in the market in a specific way’,” it says.
The proper test for the existence of a conspiracy, says the commission, “is whether there are sufficient facts ‘from which a reasonable possible inference may be drawn’ that there existed a single overall conspiracy that contravened the [Competition] Act”.
Unsurprisingly, the banks are not happy with the lack of specifics tying them to a conspiracy. They’re also critical of the commission’s failure to link any of their individual traders to a conspiracy.
However, the commission doesn’t regard this as its problem. “The respondents [the banks] cannot be prejudiced by the commission’s inability to determine which bank or banks within a group of companies employed a specific trader,” it says. “This information is the respondents’ knowledge.”
A competition lawyer who has followed the case tells the FM the commission’s difficulty is that it’s relying on the DoJ’s evidence. “But the commission has no control over the DoJ’s witnesses — it doesn’t even have access to them,” says the lawyer, emphasising that even the DoJ is finding it difficult to prosecute these cases.
The next development in the case is the Competition Tribunal’s decision following the second round of exceptions, which were brought by the banks and heard by the tribunal in November and December 2021. That decision is “pending”, which in tribunal language means “don’t hold your breath”.
Worryingly, this second round of exceptions contained little that was different from the first.
All of which means the commission’s case could drag on for several more years. Unless, of course, new competition commissioner Doris Tshepe comes up with a fresh perspective on the matter.
And the encouraging news for Tshepe is that the paucity of headline-grabbing prosecutions does not mean manipulation is running riot in global forex markets.
The forex trader tells the FM all the big banks have signed up to the forex global code of best practice, which attempts to enforce certain standards — though he warns that nonbanks, such as Phillips’s hedge fund, Glen Point Capital, aren’t expected to sign up. Given their power in the market, that is a gap that needs to be closed.
Meanwhile, the market itself may be implementing some correcting measures. Within days of Phillips’s arrest, a large US-based asset management firm put several employees who had worked with him on leave.
And growing evidence that clients of banks/forex traders are keen to take legal action where manipulation is identified should also improve market behaviour. Though the chance to offer expert evidence in one of these cases does create a certain moral hazard. In 2020, Katz was hired as a $400-an-hour consultant to advise investors planning to sue Barclays and UBS for alleged forex manipulation.
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