HSBC Traders Used Code Word to Trigger Front-Running, U.S. Says

Updated on
  • ‘My watch is off’ was allegedly signal before a large order
  • Mark Johnson is on trial charged with fraud, conspiracy

Mark Johnson in New York on Sept. 18.

Photographer: Mark Kauzlarich/Bloomberg

With just four words, Mark Johnson allegedly passed a secretive signal to fellow HSBC Holdings Plc currency traders to launch a buying spree of pounds: "My watch is off."

The bank’s former global head of foreign exchange alerted the traders around the globe via phone calls and chat messages, prosecutors at Johnson’s fraud trial say. The gambit in December 2011 was designed to take advantage of a $3.5 billion client order to buy sterling, they claim.

Jurors on Friday listened to recordings of the calls, which prosecutors claim show Johnson tipped off a trader in Hong Kong. That signal eventually reached others on both sides of the Atlantic and sparked a flurry of trading, they say. Johnson was in New York that day, speaking to Stuart Scott, the bank’s former head of currency trading in Europe, who was in London, on the day of the transaction for the bank’s client, Cairn Energy Plc

The next day, Johnson discussed the events with a colleague on a call recorded by the bank.

"New York managed a bit and London just had a bonanza on it," Johnson said. "I had quite a big day anyway, because I made it on other stuff, then we just ramped it on that."

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Johnson’s lawyer, John Wing, had tried to keep the recordings out of the case, telling U.S. District Judge Nicholas Garaufis that they shouldn’t be aired because his client used the term "watch" to mean something entirely different. "‘My watch is off’ is a code designed to tell people keep this confidential, don’t let the salesmen know about it," Wing said.

Johnson is on trial in federal court in Brooklyn, New York, accused of a scheme that produced an $8 million profit for his bank. Prosecutors rested their case on Friday after presenting evidence over two weeks, and the defense will begin its case when the trial resumes on Oct. 10.

Jurors spent much of Friday listening to recorded calls. In another one, Johnson is heard discussing the effect of the deal on bankers’ compensation.

"It makes us look good if we have a good December," Johnson said. "Hopefully, you can only hope to influence things when numbers are rounded come the end of the year, so um, yeah! It’s good for morale."

HSBC was hired by Cairn to convert the proceeds of a unit sale from dollars into pounds. Jurors also heard a phone call from October 2011 in which Johnson assured a Cairn adviser that executing the currency transaction as a fix trade was the preferred method "because there is transparency." The fix is or the set period in which currency transactions are used to determine benchmark rates.

He added that he had seen transactions that have "ramped the fix," or been manipulated to benefit a bank. "I’m horrified when I see people do that sort of thing because it’s just obvious," Johnson told the Cairn adviser.

Despite those assurances, prosecutors say Johnson and Scott had already been buying pounds, and about 90 minutes before the Cairn trade they tipped off other currency traders at the bank. In a call, the two are heard discussing how they should refrain from pushing the price of the pound too high, which would make Cairn officials "squeal."

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Later during the call, Johnson can be heard giving direction to Scott and complaining about the trader who was executing the Cairn transaction. “I do all the work, and he gets all the glory,” Johnson said of the trader. 

On Thursday, prosecutors showed jurors charts of trading by Johnson, Scott, four traders in New York and five traders in London that day, showing they made about $3 million in profit. Rob Sherman, a spokesman for HSBC in New York, declined to comment.

The defense suggested in questioning that the spate of buying by these other men at the bank was an attempt to help Frank Cahill, then an HSBC currency trader who was fulfilling Cairn’s order.

But Ross Waller, a former trader at Bridgewater Associates who testified as an expert witness for the government, said Thursday that Cahill’s feverish demand for pounds, compounded with the frenzied buying by the other traders, ended up dominating about 75 percent of trading in the five minutes before the Cairn trade was executed, and caused the pound’s price to jump. Trading records also indicate the others weren’t selling to Cahill to help him fill the order, Waller said.

U.S. government exhibit

The case is U.S. v. Johnson, 16-cr-457, U.S. District Court, Eastern District of New York (Brooklyn).

— With assistance by Lananh Nguyen

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