Ex-HSBC Currency Trader Convicted Of Fraud In Massive Front-Running Scandal

Ex-HSBC currency trader Mark Johnson, who was unwittingly captured on an audio recording saying “I think we got away with it,” has just been convicted by a jury in New York of fraud for front-running a $3.5 billion transaction that netted his firm some $8 million in illicit profits. Per Bloomberg:

Former HSBC Holdings Plc currency trader Mark Johnson was found guilty of fraud for front-running a $3.5 billion client order, a victory for U.S. prosecutors as they seek to root out misconduct in global financial markets.

He was convicted on Monday after a month-long trial in Brooklyn, New York.

Johnson was the first person to be tried since the global currency-rigging scandal that resulted in global banks paying more the $10 billion in penalties. The charges stemmed from HSBC’s execution of a trading order from Cairn Energy Plc in 2011 to convert the proceeds of a unit sale from dollars into pounds.

“This sends a signal to traders and banks that this type of behavior is absolutely inappropriate and will be pursued by the government,” Michael Weinstein, a former Justice Department trial attorney, said. “That’s a big hammer over the banks — it may force them to monitor and self-regulate their people.”

For those who haven’t followed this particular story, Mark Johnson was arrested at New York’s Kennedy Airport in 2016 before he could return to the U.K. following a nearly 3-year investigation into efforts on the part of several large investment banks to rig FX markets but Stuart Scott has remained free at his home in the London suburbs pending the outcome of the extradition proceedings. Per Bloomberg:

Mark Johnson, HSBC’s global head of foreign exchange cash trading in London, was taken into custody at John F. Kennedy International Airport Tuesday and is scheduled to appear before a judge in federal court in Brooklyn Wednesday morning, said the people, who asked not to be named because the case hasn’t been made public. He’s charged with conspiracy to commit wire fraud, the people said.

According to Bloomberg, Johnson’s arrest comes more than a year after five global banks pleaded guilty to charges related to the rigging of currency benchmarks. HSBC, which wasn’t part of those criminal cases, in November 2014 agreed to pay $618 million in penalties to U.S. and British regulators to resolve currency manipulation allegations. HSBC, which still faces investigations by the Justice Department and other authorities for the conduct, has set aside $1.3 billion for possible settlements, according to an August filing.

Rob Sherman, an HSBC spokesman, and Peter Carr, a Justice Department spokesman, declined to comment.

According to the original DOJ complaint, HSBC was selected by Cairn Energy Plc to execute a foreign exchange transaction – which was going to require converting approximately $3.5 billion in sales proceeds into British Pound Sterling – in October 2011. But, before executing that trade, he tipped off a bunch of HSBC traders who loaded up their proprietary accounts with Pounds just before the massive trade sent the currency higher.

“As alleged, the defendants placed personal and company profits ahead of their duties of trust and confidentiality owed to their client, and in doing so, defrauded their client of millions of dollars,” stated United States Attorney Capers. “When questioned by their client about the higher price paid for their significant transaction, the defendants wove a web of lies designed to conceal the truth and divert attention away from their fraudulent trades.  The charges and arrest announced today reflect our steadfast commitment to hold accountable corporate executives and licensed professionals who use their positions to fraudulently enrich themselves.”

“The defendants allegedly betrayed their client’s confidence, and corruptly manipulated the foreign exchange market to benefit themselves and their bank,” said Assistant Attorney General Caldwell. “This case demonstrates the Criminal Division’s commitment to hold corporate executives, including at the world’s largest and most sophisticated institutions, responsible for their crimes.”

As we’ve noted over the past couple of weeks, tidbits of the prosecution’s case has made it’s way into the media recently, including reports last week that Johnson used the code phrase “my watch is off” to trigger trading by HSBC traders all around the globe. Meanwhile, as Law360 recently pointed out, jurors also had the opportunity to hear some rather damning recordings of Johnson’s phone conversations with traders, including the one below in which he says “I think we got away with it.”

Prosecutors played a recording of a call between Johnson and Stuart after the 3 p.m. fix as they debrief, with Johnson telling Stuart, “I think we got away with it,” but Stuart replies that HSBC executive Dipak Khot — who acted as the go between with Cairn and HSBC — thinks otherwise and suspects that Cairn will protest.

Johnson in turn argued that Cairn is still in a better position than it would have been if it had taken any other offers to execute the deal in alternate methods as opposed to the fix. “They don’t really have a lot of room to complain,” he said on the call.

But as Cahill was trading ahead of the 3 p.m. fix on the day of the transaction, Johnson sounded more concerned about “ramping it up” too much. Jurors heard another recording of a call between Johnson and Scott, with Scott talking to Cahill in the background as he trades, in which Johnson cautions against spiking the price of sterling too high out of concern that Cairn will “squeal.”

“Frank, Frank if it rates above 30 at the fix, I think they’ll start to ah … if you need to buy them, obviously, but ideally don’t ramp it above 30,” Scott tells Cahill. “Do what you need to do, but … sorry I know I’m probably not helping much…I’ll leave you alone.”

“Is he getting a bit tetchy?” Johnson asks.

“No, he’s not,” Scott replies.

“He can’t, fucking moaning bastard,” Johnson said. “I do all the work and he gets all the glory.”

Jurors heard that days later in a call with HSBC forex trader Ed Carmichael in Hong Kong, Johnson told him that HSBC’s London forex trading desk, “just had a bonanza” on the Cairn deal, and described his response when Cairn sought an explanation on the less than stellar result for the oil and gas developer.

Of course, when HSBC’s client complained about their less than stellar execution price, Johnson admits that he blamed all the usual suspects: “Russians, other central banks, all that sort of stuff.”

“And they said, well you know it jumped up a bit, who else was buying? And we said the usual Russian names, other central banks, all that sort of stuff,” Johnson said on the call.

As we noted last week, nearly a dozen HSBC traders around the globe netted over $8 million in profits by allegedly front-running their own client.

Of course, while the DOJ will undoubtedly celebrate their conviction in the media, there is little doubt that Mark Johnson’s “pre-hedging” scandal is hardly unique for an industry that has been built on front-running clients.

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