United States v. Phillips

• Docket Number: 22-cr-138 (LJL)
• Decision Date: 01 September 2023
• Parties: UNITED STATES OF AMERICA, v. NEIL PHILLIPS, Defendant.
• Court: U.S. District Court — Southern District of New York

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UNITED STATES OF AMERICA, v. NEIL PHILLIPS, Defendant.

No. 22-cr-138 (LJL)

United States District Court, S.D. New York

September 1, 2023

OPINION AND ORDER

LEWIS J. LIMAN, UNITED STATES DISTRICT JUDGE.

Defendant Neil Phillips (“Defendant” or “Phillips”) moves, pursuant to Federal Rule of Criminal Procedure 12(b)(3)(C), to dismiss the indictment against him. Dkt. No. 21. For the following reasons, the motion is denied without prejudice to Defendant making a Rule 29 motion for judgment of acquittal after the close of the Government's evidence and, if the Rule 29 motion is not granted then, after the close of all evidence.

BACKGROUND

On March 3, 2022, a grand jury sitting in the Southern District of New York returned a four-count indictment (the “Indictment”) against Defendant. Dkt. No. 2. Count One charges Defendant with conspiracy to commit the crime of commodities fraud under Title 7, United States Code Sections 9(1) and 13(a)(5), and Title 17, Code of Federal Regulations, Section 180.1, in violation of Title 18, United States Code, Section 371. Id. ¶¶ 30-32. Count Two charges him with commodities fraud, in violation of Title 7, United States Code, Sections 9(1) and 13(a)(5) and Title 17, Code of Federal Regulations, Section 180.1 Id. ¶¶ 33-34. Count Three charges Defendant with conspiracy to commit the crime of wire fraud under Title 18, United States Code, Section 1343, in violation of Title 18, United States Code, Section 371 Id. ¶¶ 38-39. Finally, Count Four charges him with wire fraud in violation of Title 18, United States Code, Section 1343. Id. ¶¶ 38-39.

All four counts arise from the same alleged scheme in or about December 2017 to artificially manipulate the United States dollar (“USD”)/South African rand (“ZAR”) exchange rate in order to trigger a payment under a barrier options contract into which Defendant's hedge fund had entered. Id. ¶ 1. At all relevant times Phillips was the co-founder and co-Chief Investment Officer of a hedge fund (the “Hedge Fund”) based in the United Kingdom, which was registered in the United States as a commodity pool operator with the Commodity Futures Trading Commission (“CFTC”). Id. ¶¶ 3-4.

In October 2017, through a financial services firm that acted as an intermediary on behalf of undisclosed underlying clients, the Hedge Fund purchased a “one touch” digital barrier option for the USD/ZAR currency pair with a notional value of $20 million, a barrier rate of 12.50, and an expiration date of January 2, 2018 (the “One Touch Option”). Id. ¶ 10-11. The Indictment alleges that the financial intermediary firm “permits its underlying clients to maintain anonymity in such transactions.” Id. ¶ 11. The Hedge Fund's counterparty to the One Touch Option was a subsidiary of a bank headquartered in New York, New York (“Bank-1”). Id. At no time were the Hedge Fund and Bank-1 aware of the identity of each other. Id.

Under the terms of the One Touch Option, in the event that the USD/ZAR exchange rate went below 12.50 at any point prior to on or about January 2, 2018, the Hedge Fund would be entitled to a $20 million payment. Id. ¶ 10. The Hedge Fund subsequently allocated the notional value of the One Touch Option to a client fund (“Client Fund-1”) such that Client Fund-1 would receive $4,340,000 in the event that the $20 million payment was triggered and the Hedge Fund would receive the remaining $15,660,000. Id. ¶ 12.

A bank that was headquartered in Manhattan, New York (“Bank-2”) acted as the Hedge Fund's prime broker in connection with the One Touch Option. Id. ¶ 13. After the Hedge Fund entered into the One Touch Option, Bank-2 provided the Hedge Fund with a letter agreement setting forth the terms and conditions of the transaction. Id. These terms and conditions indicated that the Hedge Fund would act as the Calculation Agent in connection with the One Touch Option and required the Hedge Fund to “act[] in good faith and in a commercially reasonable manner” in that capacity and that the Hedge Fund's “determinations and calculations” would be “binding in the absence of manifest error.” Id. The letter agreement incorporated by reference the “2005 Barrier Option Supplement” published by the International Swaps and Derivatives Association, Inc., which stated, among other things, that the “Barrier Determination Agent” is “the party who determines whether or not a Barrier Event has occurred and provides notice if it determines that a Barrier Event has occurred” and that the “Barrier Determination Agent shall be the Calculation Agent” unless otherwise specified. Id. The 2005 Barrier Option Supplement also stated that the “occurrence of a Barrier Event shall be determined in good faith and in a commercially reasonable manner by the Barrier Determination Agent.” Id.

Throughout November and mid-December 2017, the USD/ZAR exchange rate fluctuated between approximately 14.50 and approximately 13.15. Id. ¶ 14. On or about December 18, 2017, following the announcement that a particular candidate had been elected president of the African National Congress political party in South Africa, the USD/ZAR exchange rate dropped substantially to as low as approximately 12.52, but did not breach the 12.50 barrier. Id. ¶ 15. Between shortly before midnight on December 25, 2017 and the early morning of December 26, 2017, faced with the looming expiration of the One Touch Option, Defendant, located in South Africa at the time, directed a large number of spot trades, selling approximately $725 million for ZAR. Id. ¶ 18. Defendant acted through a Singapore-based employee of a third bank (the “FX Trading Bank”). Id. The express purpose of these trades was to drive the USD/ZAR exchange rate below 12.50. Id. ¶¶ 18, 20. The trades were conducted through a Bloomberg chat room, which included two other employees of the Hedge Fund, one of whom was located in London and the other in New York, New York, and another employee of the FX Trading Bank, who was located in New York, New York. Id. ¶ 19. The Indictment does not allege whether either the Hedge Fund employee or the employee of the FX Trading Bank located in New York, New York had any involvement in the trades.

The scheme was successful. At approximately 12:42 a.m. London time on December 26, 2017, the Singapore-based employee of the FX Trading Bank reported to Defendant that he had sold USD for 12.4990 ZAR. Id. ¶ 20(h). A pricing service showed the low as 12.4975. Id. ¶ 20(i). Phillips directed the Singapore-based employee of the FX Trading Bank to confirm the details with the London-based employee of the Hedge Fund, which was done through the Bloomberg chat room. Id. ¶ 20(j). At 12:52 a.m. London time on December 26, 2017, Defendant instructed the London-based employee of the Hedge Fund to notify the intermediary firm through which the Hedge Fund purchased the One Touch Option that the One Touch Option had been triggered. Id. ¶ 23. The email that the employee sent to the intermediary firm omitted the fact that the triggering event had occurred as a result of the Hedge Fund's USD/ZAR trades. Id. On December 27, 2017, an employee of the Hedge Fund also notified Bank-2 that the One Touch Option had been triggered and again omitted the fact that the triggering event had occurred as a result of the Hedge Fund's spot trading. Id. ¶ 24. On December 27, 2017, the Hedge Fund's counterparty to the transaction sent a $20 million wire transfer, which passed through New York, New York, to the broker for the intermediary firm. Id. ¶ 25. On December 28, 2023, Bank-2, the Hedge Fund's prime broker, sent a wire transfer of $15,660,000 to one of the Hedge Fund's bank accounts and a wire transfer of $4,340,000 to a bank account of the client of the Hedge Fund; both wires passed through New York, New York. Id.

On December 26, 2017, the USD/ZAR spot trades were settled through a settlement bank headquartered in New York, New York (the “Settlement Bank”). See id. ¶¶ 9, 26. The Settlement Bank also received settlement instructions from the FX Trading Bank and another bank acting on the Hedge Fund's behalf in the United States. Id. ¶ 26. On December 28, 2017, the settlement bank settled currency trades across all eighteen currencies in which it transacts and the FX Trading Bank transferred USD into accounts held at the Federal Reserve Bank of New York and the Settlement Bank transferred USD from an account held at the Federal Reserve Bank of New York to the other bank acting on behalf of the Hedge Fund. Id.

DISCUSSION

Federal Rule of Criminal Procedure 7(c)(1) provides that an indictment “must be a plain, concise, and definite written statement of the essential facts constituting the offense charged.” Fed. R. Cr. P. 7(c)(1). “A defendant seeking to challenge the sufficiency of an indictment on a motion to dismiss faces a high hurdle.” United States v. Silver, 117 F.Supp.3d 461, 464-65 (S.D.N.Y. 2015); see also United States v. Pham 2022 WL 993119, at *3 (S.D.N.Y. Apr. 1, 2022) (Nathan, J.) (“A defendant faces a high standard in seeking to dismiss an indictment.” (citation omitted)). “An indictment is sufficient if it ‘first, contains the elements of the offense charged and fairly informs a defendant of the charge against which he must defend, and, second, enables him to plead an acquittal or conviction in bar of future prosecutions for the same offense.'” United States v. Stringer, 730 F.3d 120, 124 (2d Cir. 2013) (quoting Hamling v. United States, 418 U.S. 87, 117 (1974)); see also id. (“[A]n indictment need ‘do little more than to track the language of the statute charged and state the time and place (in approximate terms) of the alleged crime.'” (citation omitted)).

It is not the function of an indictment to inform the defendant of the evidence or the facts...