Ex-HSBC Currency Trader Convicted Of Fraud In Massive Front-Running Scandal

Ex-HSBC currency trader Mark Johnson, who was unwittingly captured on an audio recording saying "I think we got away with it," has just been convicted by a jury in New York of fraud for front-running a $3.5 billion transaction that netted his firm some $8 million in illicit profits.  Per 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 after a month-long trial in Brooklyn, New York.


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


"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."


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.”

As we've noted over the past couple of weeks, tidbits of the prosecution's case has made it's way into the media recently, including reports last week that Johnson used the code phrase "my watch is off" to trigger trading by HSBC traders all around the globe.  Meanwhile, as Law360 recently pointed out, jurors also had the opportunity to hear some rather damning recordings of Johnson's phone conversations with traders, including the one below in which he says "I think we got away with it."

Prosecutors played a recording of a call between Johnson and Stuart after the 3 p.m. fix as they debrief, with Johnson telling Stuart, “I think we got away with it,” but Stuart replies that HSBC executive Dipak Khot — who acted as the go between with Cairn and HSBC — thinks otherwise and suspects that Cairn will protest.


Johnson in turn argued that Cairn is still in a better position than it would have been if it had taken any other offers to execute the deal in alternate methods as opposed to the fix. “They don’t really have a lot of room to complain,” he said on the call.


But as Cahill was trading ahead of the 3 p.m. fix on the day of the transaction, Johnson sounded more concerned about “ramping it up” too much. Jurors heard another recording of a call between Johnson and Scott, with Scott talking to Cahill in the background as he trades, in which Johnson cautions against spiking the price of sterling too high out of concern that Cairn will "squeal."


“Frank, Frank if it rates above 30 at the fix, I think they’ll start to ah ... if you need to buy them, obviously, but ideally don’t ramp it above 30,” Scott tells Cahill. “Do what you need to do, but ... sorry I know I’m probably not helping much...I’ll leave you alone.”


“Is he getting a bit tetchy?” Johnson asks.


“No, he’s not,” Scott replies.


“He can’t, fucking moaning bastard,” Johnson said. “I do all the work and he gets all the glory.”


Jurors heard that days later in a call with HSBC forex trader Ed Carmichael in Hong Kong, Johnson told him that HSBC’s London forex trading desk, “just had a bonanza” on the Cairn deal, and described his response when Cairn sought an explanation on the less than stellar result for the oil and gas developer.

Of course, when HSBC's client complained about their less than stellar execution price, Johnson admits that he blamed all the usual suspects: "Russians, other central banks, all that sort of stuff."

“And they said, well you know it jumped up a bit, who else was buying? And we said the usual Russian names, other central banks, all that sort of stuff,” Johnson said on the call.

As we noted last week, nearly a dozen HSBC traders around the globe netted over $8 million in profits by allegedly front-running their own client.

Trading Gains

Of course, while the DOJ will undoubtedly celebrate their conviction in the media, there is little doubt that Mark Johnson's "pre-hedging" scandal is hardly unique for an industry that has been built on front-running clients.


LawsofPhysics Mon, 10/23/2017 - 12:55 Permalink

LOL!!!  Yeah, yeah, it's all this guy's fault.who went to prison for all that fraudulent MBS paper that remains on the Fed's balance sheet?"Full Faith and Credit"

RabbitChow Mon, 10/23/2017 - 13:06 Permalink

Ow!  Ow!  My wrist! Seriously, in China he would be put to death.  End of story. And everyone wonders why no one 'invests' in the markets anymore.

Kefeer Mon, 10/23/2017 - 13:08 Permalink

The end is near when lying is not hidden, debauchery is openly displayed, the theft of the "peoples purse" is openly displayed and no one is punished.

Turin Turambar Mon, 10/23/2017 - 13:09 Permalink

Big deal!  $10 billion in penalties.  WTH?  The penalties go to the government, NOT the people who were screwed.  If anything, this is an incentive for the regulators to let things slide until the next blatant case comes along that has to be prosecuted and results in a government WINDFALL!  The individuals who perpetrated these crimes should be held financially liable.

Herdee Mon, 10/23/2017 - 13:29 Permalink

No supervisors with any guts that can monitor traders or top management that just turns a bling eye to illegal activity when they are making big coin?  Trouble is, the bank itself should not be the only one that takes a hit which also screws shareholders.  The executive bonuses and their options should be hit as well along with the CEO and the morons on the Board of Directors who are also established crooks and thieves.

Lord Raglan Redneck Makin-tosh Mon, 10/23/2017 - 14:48 Permalink

That is a DOJ press release, not the actual indictment. A DOJ or SEC press release is designed to make those agencies look smart and efficient.The feds normally charge a person with 25 counts so they are looking at 1,000 years in prison and will plead guilty to something they didn't do out of fear, but in this case, according to the article, they charged him with one wire fraud count.  So he obviously had a lot of political suck.  Look at Jon Corzine.  Now there's a guy with political suck to spare.  Essentially stole $1.2 billion of MF Global's customer money, told Congress he had no idea how it happened, and that was the end of it. 

In reply to by Redneck Makin-tosh

Lord Raglan Redneck Makin-tosh Mon, 10/23/2017 - 15:31 Permalink

Yea, it may be hard to access PACER if you aren't a lawyer or don't have an account.  Try a Google search and see if the indictment pops up.  Sometimes they do.  Wire fraud is just the use of the phone system to orchestrate and carry out a fraud.  Used to be faxes.  I don't remember as far as intra-US calls now but international calls can trigger wire fraud.  This guy was taking international phone orders and probably executed them with international calls too.  Amazing he was only charged with one count.If you are interested in the statute, Google wire fraud and US Code.

In reply to by Redneck Makin-tosh

Redneck Makin-tosh Lord Raglan Tue, 10/24/2017 - 16:34 Permalink

Lol, it figuresI am ignorant about the genesis of the code in terms of complying with the declaration of independence but I would have thought law enforcement code of ethics would oblige prosecution of the crime that most offended the self evident right that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness - ie the hate crime against gingers !I also think the bank ought to have developed a code of practice that did not require them to brake the law in order to monitor their employees - the right to privacy being sacrosanct, the unethical procedure is more obnoxious than the alleged fraud, and again the crimes have been prosecuted in the wrong order.Needless to say I remain ignorant of details of the alleged crime of telling lies (assuming it is not the fake news implied) but would think that caveat emptor might reasonably apply and suspect that law enforcement actions and the subsequent judgement have been politically motivated without due consideration of the law and the order in which it need be applied.

In reply to by Lord Raglan

Lord Raglan Mon, 10/23/2017 - 14:02 Permalink

I don't think any of us can comprehend how common this is in even stocks and bonds.  In distressed corporate bonds, traders will tell you how good the bond is while they are selling--and even selling to you out of their own trading account.  These kind of people are maggots and just as parasitical.

skipweston Mon, 10/23/2017 - 14:07 Permalink

"Ex-HSBC Currency Trader Convicted Of Fraud In Massive Front-Running Scandal" Once again a Trader is thrown under the bus for the HSBC Management. We can only assume in good faith that The CEO, the VPs and the BODs did not encourage the Traders to rig the FX market for profit. They were unaware of that their rouge traders were manipulating FX prices. The rigging fines should be taken from the CEO's bonus, then maybe they will stop rigging markets.

whatswhat1@yahoo.com Mon, 10/23/2017 - 14:18 Permalink

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It's all one big fraud.  Everything!  Hedge accordingly.

spaniel Mon, 10/23/2017 - 15:01 Permalink

The Trader deserves jail.Maybe a reduced sentence, either now or later, when he implicates the Banks Management and others.Hang 'em high !

moneybots Mon, 10/23/2017 - 15:36 Permalink

"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 No it doesn't. Not one banker is in prison for the massive financial fraud during the housing bubble.

taketheredpill Mon, 10/23/2017 - 16:17 Permalink

 "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.  So besides the Trader did any senior Bank personnel go to jail...hello?