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Hedge Fund Co-Founder Charged with FX Market Manipulation and Fraud

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On September 1, 2022, the co-founder and chief investment officer of UK hedge fund Glen Point Capital was charged with committing foreign exchange (FX) market manipulation and fraud. According to the US Department of Justice press release, the defendant has been accused of participating in a scheme to artificially manipulate the United States dollar (USD) / South African rand (ZAR) exchange rate to fraudulently trigger a $20 million payment under a barrier options contract. 

The defendant has been charged with one count of conspiracy to commit commodities fraud, which carries a maximum prison term of five years, and one count of commodities fraud, with a maximum prison term of 10 years. The defendant is also charged with a count of wire fraud and conspiracy to commit wire fraud, each carrying a maximum prison term of 20 years.

The barrier option contract

A “one touch digital option” is a type of trade that provides the buyer with a fixed payout if an underlying asset reaches a predefined barrier from start to maturity. As alleged in the indictment, Glen Point Capital purchased a one-touch digital option for the USD/ZAR currency pair in October 2017. Under the terms of the trade, if the USD/ZAR exchange rate went below the rate of 12.50 before January 2, 2018, Glen Point Capital would be entitled to a payment of $20 million. 

Eight days before the option was set to expire – Christmas Day 2017 – the defendant engaged in a scheme to trigger the payment by intentionally and artificially manipulating the USD/ZAR rate to drive the rate below 12.50. Through a series of Bloomberg chat messages, the defendant directed a Singapore-based employee to sell approximately $725 million in exchange for approximately 9,070,902,750 ZAR, causing the USD/ZAR rate to fall substantially. When the rate went just below 12.50, the trading ceased. 

On notifying the financial services firm – through which the option was purchased – that the $20 million one-touch option had been triggered, the defendant omitted to declare the aggressive trades that ultimately manipulated the exchange rate.

Foreign currency (forex) fraud

Commenting on the scheme, Rosa Abrantes-Metz, an economist who co-heads the Brattle Group’s antitrust practice, said, “This type of conduct, unfortunately, happens more often than we would like to see.” Likewise, the Commodities Futures Trading Commission (CFTC) has “witnessed a sharp rise in forex trading scams in recent years.”

In September 2020, a former currency trader at a major multinational bank was sentenced to eight months in jail and ordered to pay a $150,000 criminal fine for price fixing and bid rigging in the global FX market. In April 2021, three men were charged with conducting a foreign exchange trading scheme to steal $30 million from their investor victims.

To mitigate the threat of this fraud typology, CFTC has issued guidance on the red flags to be aware of, including:

  • Promises that with forex, there is no “bear” market
  • Firms that claim you can or should trade in the interbank market
  • Requests to send or transfer cash quickly via the internet, by mail, or otherwise
  • Difficulty getting background information about the person or company

In light of this fraud scheme, compliance staff should consider the effectiveness of their firms’ trade surveillance system. Communications and times of system access may also require monitoring. Before participating in forex trading, CFTC recommends contacting them to check the company’s registration status, business background, and disciplinary history.

 

On September 1, 2022, the co-founder and chief investment officer of UK hedge fund Glen Point Capital was charged with committing foreign exchange (FX) market manipulation and fraud. According to the US Department of Justice press release, the defendant has been accused of participating in a scheme to artificially manipulate the United States dollar (USD) / South African rand (ZAR) exchange rate to fraudulently trigger a $20 million payment under a barrier options contract.  The defendant has been charged with one count of conspiracy to commit commodities fraud, which carries a maximum prison term of five years, and one count of commodities fraud, with a maximum prison term of 10 years. The defendant is also charged with a count of wire fraud and conspiracy to commit wire fraud, each carrying a maximum prison term of 20 years.

The barrier option contract

A “one touch digital option” is a type of trade that provides the buyer with a fixed payout if an underlying asset reaches a predefined barrier from start to maturity. As alleged in the indictment, Glen Point Capital purchased a one-touch digital option for the USD/ZAR currency pair in October 2017. Under the terms of the trade, if the USD/ZAR exchange rate went below the rate of 12.50 before January 2, 2018, Glen Point Capital would be entitled to a payment of $20 million.  Eight days before the option was set to expire - Christmas Day 2017 - the defendant engaged in a scheme to trigger the payment by intentionally and artificially manipulating the USD/ZAR rate to drive the rate below 12.50. Through a series of Bloomberg chat messages, the defendant directed a Singapore-based employee to sell approximately $725 million in exchange for approximately 9,070,902,750 ZAR, causing the USD/ZAR rate to fall substantially. When the rate went just below 12.50, the trading ceased.  On notifying the financial services firm - through which the option was purchased - that the $20 million one-touch option had been triggered, the defendant omitted to declare the aggressive trades that ultimately manipulated the exchange rate.

Foreign currency (forex) fraud

Commenting on the scheme, Rosa Abrantes-Metz, an economist who co-heads the Brattle Group’s antitrust practice, said, “This type of conduct, unfortunately, happens more often than we would like to see.” Likewise, the Commodities Futures Trading Commission (CFTC) has “witnessed a sharp rise in forex trading scams in recent years.” In September 2020, a former currency trader at a major multinational bank was sentenced to eight months in jail and ordered to pay a $150,000 criminal fine for price fixing and bid rigging in the global FX market. In April 2021, three men were charged with conducting a foreign exchange trading scheme to steal $30 million from their investor victims. To mitigate the threat of this fraud typology, CFTC has issued guidance on the red flags to be aware of, including:
  • Promises that with forex, there is no “bear” market
  • Firms that claim you can or should trade in the interbank market
  • Requests to send or transfer cash quickly via the internet, by mail, or otherwise
  • Difficulty getting background information about the person or company
In light of this fraud scheme, compliance staff should consider the effectiveness of their firms’ trade surveillance system. Communications and times of system access may also require monitoring. Before participating in forex trading, CFTC recommends contacting them to check the company’s registration status, business background, and disciplinary history.   [cta_card title="A Spotlight on Financial Crime" cta_img="" category="" bodytext="Stay on top of regional trends and novel criminal techniques so you can protect your business from financial crime." cta_text="Download Our Free Global Compliance Report" cta_url="https://complyadvantage.com/insights/the-state-of-financial-crime-2022/"]

Originally published September 9, 2022, updated September 9, 2022

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