Ex-HSBC Currency Trader Convicted of Fraud for Front-Running

Updated on
  • U.S. says Johnson took advantage of $3.5 billion client order
  • Defense lawyer says Brooklyn jury ‘convicted an innocent man’

Mark Johnson in New York on Sept. 18.

Photographer: Mark Kauzlarich/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 on nine of 10 fraud and conspiracy counts after a month-long trial in Brooklyn, New York.

"They’ve convicted an innocent man," defense lawyer John Wing said as he left courtroom.

Johnson, 51, was the first person to be tried since the global currency-rigging scandal that resulted in global banks paying more than $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.

Johnson looked down and shook his head as the first guilty count was announced by the jury foreman. Prosecutor Carol Sipperly asked the court to order Johnson to surrender his passport and remain in New York. The judge ordered that he not seek a new passport from British authorities. He will be sentenced at a later date. Each count carries a maximum 20-year prison sentence, although Johnson is likely to receive a shorter sentence.

"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."

Bank Probe

HSBC wasn’t accused of wrongdoing, but the bank has been under investigation over currency trading and is in active settlement talks with the Justice Department and U.S. regulators, according to a July 31 regulatory filing. Rob Sherman, a spokesman for HSBC, declined to comment.

The verdict comes as prosecutors prepare for other trials targeting manipulation in markets including currencies, commodities and mortgage-backed securities. 

In one, three former employees of JPMorgan Chase & Co., Barclays Plc, and Citigroup Inc. are awaiting trial in Manhattan after being accused of using an online chat room they dubbed "the Cartel" to share information and fix currencies. In another, a former trader at UBS Group AG is accused of rigging the price of precious metals.

"This conviction will embolden the U.S.," said Peter Henning, a law professor at Wayne State University in Detroit. "The U.S. authorities have shown they’re able to police global markets.”

The Johnson trial offered the Justice Department a chance to regain momentum after an appeals court in July tossed out convictions of two ex-Rabobank Groep traders for manipulating the Libor benchmark rate. The court said prosecutors had improperly used testimony they were forced to provide to a U.K. financial regulator to build the U.S. case.

Johnson was arrested by federal agents at New York’s Kennedy Airport in July 2016, just as he was about to board a flight to the U.K. Johnson plans to appeal.

In HSBC Currency Trade Charts, U.S. Offers Its Theory of a Crime

Stuart Scott, the bank’s former head of currency trading in Europe, was also charged in the case. He is awaiting a ruling on his bid to avoid extradition to the U.S.

According to prosecutors, Johnson and Scott were among 11 currency traders feverishly buying pounds just before the Cairn transaction. The traders in New York and London jumped ahead, driving up the price of the pound to its highest in two days on Dec. 7, 2011, minutes before the 3 p.m. deal, according to a government witness. Prosecutors said they were tipped by Johnson.

HSBC’s traders dominated 75 percent of the currency’s trading on a major platform in the five minutes before the fix, according to prosecutors. They collectively made the bank $8 million in profit, just after Johnson used what prosecutors said were code words -- "my watch is off" -- according to chat transcripts and recorded telephone calls.

The U.S. called officials from Cairn to testify about their talks with Johnson and Scott, who advised them to do the trade at 3 p.m. instead of 4 p.m. Prosecutors said both men knew the earlier time was easier to manipulate.

The government also played numerous recorded phone calls including one in which Johnson said, “I think we got away with it."

‘I Think We Got Away With It:’ Listen to HSBC Trader Phone Calls

A key government witness was Frank Cahill, the former HSBC trader who conducted the Cairn transaction. He said he was part of a separate scheme in which he and traders at other banks used instant-chat groups to communicate with each other to influence benchmarks and maximize profits.

Cahill said Scott directed him to begin purchasing pounds about an hour before the 3 p.m. transaction. He testified that he employed an "aggressive" manner of buying that caused the pound’s price to go up, just after Scott directed him to "ramp" up the price. During his trades, Cahill also said he realized other HSBC colleagues were also purchasing pounds and competing with him, resulting in an "aggressive jerking move higher" in price. 

Jurors declined to explain the guilty verdict after leaving court, although a member of the panel said the one not-guilty finding was based on a very short audio recording.

Johnson took the witness stand in his defense, testifying that he was in New York when the trades took place and left Scott "in charge" of the transaction in London. He said HSBC provided high-quality execution and gave Cairn a "fair" price. Purchasing of pounds before the transaction was an accepted practice called "pre-hedging," he said.

Accused Ex-HSBC Trader Says London Colleague Was in Charge

If the pound’s price rose during the transaction, Johnson attributed it to the massive size of the trade and not manipulation. He insisted neither he nor those he supervised were prohibited from buying pounds.

Johnson’s lawyers called Kevin Rodgers, Deutsche Bank AG’s former global foreign-exchange trader who worked with Johnson at the Frankfurt-based bank. Rodgers said the rise in the pound was instead caused by the size of the trade and that the transaction was conducted in a manner that was common in the $5.1 trillion-per-day currency market.

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

— With assistance by Suzi Ring

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