Here's How Much Each HSBC Trader Made In Their FX Front-Running Scheme

October 17, 2017
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Last week we wrote about how some former HSBC FX traders, led by Mark Johnson, orchestrated a carefully crafted plan to front-run a massive buy order for British Pounds using the code phrase “my watch is off.” 

Now, courtesy of court filings in a British case to extradite one of the participants, Stuart Scott, we learn exactly how much each HSBC trader made for his trading book in the illicit scheme that netted a total of $8 million in profits.  Per Bloomberg:

“The defendant personally obtained over $500,000 profit,” the U.S. Justice Department, represented by British lawyer Mark Summers, said in written arguments prepared for the hearing. “The offenses of which he is accused are highly serious. They involve a systematic and organized conspiracy to defraud, committed in breach of trust.”

Scott was charged, along with his ex-boss Mark Johnson, by the Justice Department in July 2016 with using insider knowledge to front-run a $3.5 billion currency deal by Cairn Energy Plc that made the bank $8 million. Johnson is on trial in New York and a jury there could begin deliberations this week.

 

Here’s how everyone else made out per the DOJ:

Trading Gains

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.”

Not surprisingly, Scott is fighting the extradition case saying that his front-running scheme didn’t hurt anyone in the U.S. and that “for a person to be extradited the behavior must also be illegal in their home country...”

Scott is fighting the request, claiming American prosecutors are targeting conduct that didn’t happen or hurt anyone in the U.S.

Lawyers for Scott on Monday told Judge Michael Snow the Justice Department had misrepresented the behavior and was attempting to regulate conduct that didn’t occur or cause any harm in the U.S. They also raised issues of “dual criminality” — for a person to be extradited the behavior must also be illegal in their home country.

“This is an aggressive assertion by the U.S. of its jurisdiction to try conduct which substantially occurred in the U.K.,” Jonathan Caplan, Scott’s lawyer, told the court. “There was no intended or real, actual harm to the U.S.”

…while we’re certainly not experts in international law we find it hard to believe that bilking your clients out of millions of dollars by front-running their trade is not illegal in the U.K.

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