A historic event took place moments ago when Mark Johnson, the global head of cash FX at HSBC was arrested at JFK airport for his role in a "conspiracy to rig currency benchmarks", and specifically for frontrunning customer orders. He is the first person charged by the US in the ongoing FX rigging probe.
As Bloomberg reports, a "senior manager at HSBC Holdings Plc was arrested in New York for his role in a conspiracy to rig currency benchmarks, according to two people familiar with the matter, becoming the first person to be charged in the Justice Department’s three-year investigation into foreign-exchange rigging at global banks."
The DOJ adds that Mark Johnson, 50, a U.K. citizen and U.K. and U.S. resident, and Stuart Scott, 43, a U.K. citizen and resident, were charged by complaint with conspiracy to commit wire fraud. Johnson was arrested last night at JFK International Airport in Queens, New York, and will be arraigned later today before U.S. Magistrate Judge Lois Bloom of the Eastern District of New York
From Johnson's bio:
Johnson is global head of foreign exchange cash trading at HSBC, based in London. Prior to joining HSBC in 2010, he was founding managing partner and chief investment officer at Johnson Stewart Partners. Before that, he was global head of trading at Deutsche Bank.
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.
From the DOJ complaint:
“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.”
The full details, as revealed in the DOJ complaint, allege that in November and December 2011, Johnson and Scott misused information provided to them by a client that hired HSBC to execute a foreign exchange transaction related to a planned sale of one of the client’s foreign subsidiaries.
HSBC was selected to execute the foreign exchange transaction – which was going to require converting approximately $3.5 billion in sales proceeds into British Pound Sterling – in October 2011.
HSBC’s agreement with the client required the bank to keep the details of the client’s planned transaction confidential. Instead, Johnson and Scott allegedly misused confidential information they received about the client’s transaction.
On multiple occasions, Johnson and Scott allegedly purchased Pound Sterling for HSBC’s “proprietary” accounts, which they held until the client’s planned transaction was executed. The complaint alleges that, as part of the scheme, both Johnson and Scott made misrepresentations to the client about the planned foreign exchange transaction that concealed the self-serving nature of their actions.
Specifically, the complaint alleges that Johnson and Scott caused the $3.5 billion foreign exchange transaction to be executed in a manner that was designed to spike the price of the Pound Sterling, to the benefit of HSBC and at the expense of their client. In total, HSBC allegedly generated profits of roughly $8,000,000 from its execution of the FX Transaction for the Victim Company, including profits generated from the front running conduct by Johnson, Scott, and other traders whom they directed.
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Also on Tuesday, the U.S. Federal Reserve banned former UBS Group AG trader Matthew Gardiner from the banking industry for life for his role rigging currency benchmarks. Gardiner used electronic chat rooms, with names including The Cartel and The Mafia, to facilitate the rigging of foreign-exchange benchmarks and to disclose confidential customer information to traders at other banks, the Fed said in astatement Tuesday. That matter is separate from the one involving Johnson, the people said.
Recall that DOJ unwillingness to prosecute HSBC was the ultimate catalyst that prompted former AG Eric Holder to admit that some banks are "too big to prosecute." Perhaps with this arrest things are slowly starting to change.
Now, if frontrunning clients is officially an arrest-worthy offense, we can't wait for the DOJ to unleash a crackdown on criminal HFT algos whose only purpose in "life" is to do just that.