Ex-HSBC Trader Says Boss Ordered Him to ‘Ramp’ Up Price of PoundBy
Former currency chief Mark Johnson is on trial for fraud
Bank made millions, while Cairn Energy overpaid, U.S. claims
"Ramp it," a former head of foreign exchange at HSBC Holdings Plc told one of his traders, Frank Cahill, just before he executed a $3.5 billion currency transaction that the U.S. says was gamed from the start.
Jurors at the fraud trial of Mark Johnson listened to a recorded phone call that prosecutors say is real-time talk from a front-running scheme run by Johnson and Stuart Scott, then HSBC’s head of foreign exchange cash trading in Europe. Johnson, who pleaded not guilty, faces charges of fraud and conspiracy.
"Ideally, you don’t ramp it above 30," Scott told Cahill just before he began executing the trade on Dec. 7, 2011. Scott was sitting with him on the currency-trading desk in London while talking to Johnson by phone from New York, Cahill testified Wednesday in federal court in Brooklyn, New York.
Asked what Scott was telling him to do, Cahill said, "He wanted me to push it aggressively." Under questioning by Johnson’s lawyer, Cahill said Johnson never directed him to manipulate the trade. Scott is in the U.K fighting extradition.
Cahill, who was dismissed by Goldman Sachs Group Inc. in 2014 based on events at HSBC, testified under a non-prosecution agreement with the U.S.
HSBC had been hired by Cairn Energy Plc to convert the proceeds of a unit sale from dollars into pounds. Prosecutors say Johnson and Scott bought pounds ahead of the trade and also directed Cahill and other traders at the bank to make purchases, artificially driving the pound’s price up and resulting in an $8 million profit for the bank.
Cairn officials said HSBC had promised to "drip feed" or do incremental purchasing of U.K. currency to avoid any market disruption, with Johnson and Scott eventually convincing Cairn to trade at the 3 p.m. fix. That meant Cairn would pay the price set at the fix, or the set period in which currency transactions are used to determine benchmark rates.
Shortly after 2 p.m. Cahill said he was ordered to start buying, eventually hundreds of millions of pounds, just after the call between Johnson and Scott. Cahill said as he began to fill Cairn’s order, he saw the price of the pound rise.
"The bids and offers were increasing in value, moving up and moving up," he said. "There was an aggressive jerking in the market at the price," he said, causing him to conclude, "there would have been other people buying pounds."
After the trade, Cahill said a bank colleague confirmed his concerns, telling him that he and others at HSBC had also been aggressively buying up pounds ahead of the trade. Prosecutor Brian Young asked Cahill if his trading caused the pound to rally that day.
"During that time frame, yes," Cahill said.
Young asked if his trades were in the best interests of Cairn.
"No, in the sense that the dynamic of the fix caused the market to go higher," Cahill said.
Ross Waller, a former trader at Bridgewater Associates who testified as government witness, said he analyzed Cahill’s trading that day. Waller said he concluded his purchase of hundreds of millions of pounds drove its price to its highest that day, to Cairn’s detriment.
During his time on the stand, Cahill told jurors he came under scrutiny by regulators for a different scheme, in which he and traders at other banks colluded and shared nonpublic information and manipulated benchmark currency rates using chat rooms. During cross-examination by Johnson’s lawyer Frank Wohl, jurors were shown a series of 2011 chat transcripts of Cahill colluding with others on currency transactions and being congratulated by one trader for scheming with him.
"Nice one mate!" adding "Boom!" the trader told Cahill.
Asked why he was investigated, Cahill said "global regulating bodies found some of the behavior in the foreign-exchange market was unacceptable and I was offered to come here today in exchange."
While the U.S. agreed not to prosecute him for antitrust or benchmark rigging, he has no similar agreement with authorities in the U.K. or Europe, Cahill said.
The case is U.S. v. Johnson, 16-cr-457, U.S. District Court, Eastern District of New York (Brooklyn).