Glen Point trial casts Morgan Stanley as hedge fund’s victim

‘Standard Industry Practice’

Prosecutors contend that materiality is not an element of the offence and that the jury must only find that the scheme was capable of affecting another market participant, even if that participant didn’t lose any money.

Morgan Stanley declined to comment on the case.

The bank may not be the only one drawn into the case. According to a defence filing over the weekend, the prosecution intends to call witnesses from Goldman Sachs, Bank of America and Barclays. The witnesses weren’t identified, and it’s unclear what they would testify about, but lawyers for Mr Phillips asked the judge to bar them because the government disclosed them too late.

The trial, which is scheduled to start with jury selection on Monday followed by opening statements on Tuesday, is expected to last two weeks. Mr Phillips faces a maximum sentence of 10 years behind bars if found guilty of commodities fraud.

Mr Phillips’ defence got a boost last week when US District Judge Lewis Liman, who will oversee the trial, ruled that the jury could hear about Morgan Stanley’s own dollar-rand trades, which the defence claims were a barrier defence.

The judge also said Mr Phillips could present evidence that barrier chasing and defending are common practices among foreign-exchange traders and put former JPMorgan trader Andrew Newman on the stand as an expert witness for the defence.

“If barrier chasing and barrier defence are standard industry practice, then it is less likely that defendant’s trades would deceive or have the ability to deceive,” Judge Liman said in his October 10 decision.

To be sure, the jury could convict Mr Phillips even if it thinks Morgan Stanley engaged in similar conduct. And a famously hard-charging trader whose fund had backing by George Soros and owned a nine-bedroom London mansion may not be an ideal candidate for jury sympathy himself.

‘Trial Within a Trial’

But in arguing to bar evidence on Morgan Stanley, prosecutors expressed concern about “a trial within a trial,” with “jurors deciding the case based on their views of how Morgan Stanley’s conduct compared to the defendant’s, rather than the law.”

Casting sophisticated financial institutions as fraud victims has also been a concern in New York Attorney General Letitia James’ asset-valuation suit against former President Donald Trump and will be a major issue for federal prosecutors when they put Archegos Capital Management founder Bill Hwang on trial for market manipulation in February.

Mr Trump, who is on trial now in James’s civil case, argued that his financial statements inflating his properties’ values didn’t matter because his lenders, primarily Deutsche Bank, knew to take them with a grain of salt and conduct their own appraisals. That case will be decided not by a jury but a judge who has already found Mr Trump liable for fraud.

Mr Hwang and former Archegos chief financial officer Patrick Halligan are accused of deceiving banks including Morgan Stanley, Credit Suisse and Nomura into taking stock positions that lost them more than $US10 billion when Archegos collapsed. Defence lawyers have made clear that they plan to cast the banks not as victims but as sophisticated players who knew the game, comparing them in one 2022 hearing to “Shaq and LeBron.“

The case against Mr Phillips focuses on a frantic one-hour buying spree of the South African rand that began in the waning minutes of Christmas 2017 and ended an hour later on Boxing Day on December 26. Two months earlier, Mr Phillips had purchased the option at issue, which would be triggered when the rate fell to 12.50 rand against the dollar.

He purchased the option through an intermediary and didn’t know it was sold by Morgan Stanley. Prosecutors claim his actions were motivated in part by the option’s January 2, 2018, expiration date.

In its indictment, the government cited several chat messages on the Bloomberg terminal that Mr Phillips allegedly sent during his trades. “My aim is to trade thru 50,” he said in one. “Need to get it thru 50,” he wrote in another. Prosecutors claim the messages show his intent to manipulate the market.

A London-based derivatives trader, who asked not to be identified, said Mr Phillips’ activities seemed to reside in a gray area. Traders don’t typically trade huge amounts of money with the goal of piercing a barrier but may make a push if the market gets close to the trigger point, the trader said. That’s especially the case in relatively illiquid markets like the rand/dollar.

Mr Phillips’ rand buying binge, executed largely by a Nomura trader in Singapore, succeeded in pushing the exchange rate to the barrier. Also through intermediaries, Glen Point and one of its clients collected the $US20 million payout from Morgan Stanley.

According to defence lawyers, the bank, where Mr Phillips was once a trader himself, would have known to hedge against the option. They claim Morgan Stanley’s own Boxing Day trades showed it was trying to defend the barrier.

Big banks are no strangers themselves to accusations of misconduct in the currency markets. In 2015, JPMorgan, Citigroup, Barclays and the Royal Bank of Scotland pleaded guilty to charges that they manipulated exchange rates and agreed to pay $US2.5 billion in criminal penalties. Banks around the world have paid more than $US10 billion in penalties for misconduct in the currency markets since regulators began cracking down more than a decade ago.

The case against Mr Phillips and Glen Point is part of a larger push to take on questionable trading practices by US prosecutors and regulators, said Andrew Verstein, a law professor at University of California, Los Angeles. “Commodities and FX used to be a place where defendants could stretch the law with a high degree of confidence, and they’d be okay,” he said.

Retail Investors

But Mr Verstein pointed to the surfeit of cases in recent years charging traders over “spoofing” tactics. Five former precious-metals traders at JPMorgan and Bank of America have received prison sentences for spoofing since the beginning of 2023.

Though the defendants in trading cases typically try to argue that they are interacting with sophisticated parties who often engage in the same practices, London-based foreign-exchange consultant Thomas Stolper, the former head of global currency strategy at Goldman, said the influx of retail investors into foreign exchange markets warrants government oversight and enforcement.

“I don’t think the average retail investor is aware of the risk when they have a position on over Christmas, and they get stopped out,” Mr Stolper said.

Bloomberg