HSBC banker out on bond after arrest in currency case

Bloomberg

Federal agents surprised an HSBC Holdings Plc executive as he prepared to fly out of New York’s Kennedy airport, arresting him for an alleged front-running scheme involving a US$3.5 billion currency transaction in 2011.
Mark Johnson, HSBC’s global head of foreign exchange cash trading in London, appeared in court on Wednesday after being held in a Brooklyn jail overnight on charges of manipulating the pound to take advantage of inside information about a client, reaping US$8 million for the bank. He was released on bail and returned to his apartment on Manhattan’s Upper West Side. His lawyer said as they left the courthouse that they wouldn’t be commenting.
The US unsealed a complaint against Johnson and Stuart Scott, the bank’s former head of currency trading in Europe, making them the first individuals to be charged in a long-running probe into misconduct in the foreign-exchange markets. Scott, who reported to Johnson and left the bank in 2014, remains in the UK, and the US is likely to seek his extradition, according to a person with knowledge of the matter.
“The defendants placed personal and profits ahead of their duties of trust and confidentiality owed to their client,” Brooklyn US Attorney Robert Capers said.
The arrest and charges are a coup for the Justice Department, which has struggled to build cases against individuals in its investigation into foreign-exchange trading at global banks. US prosecutors once had so much confidence in the quality of evidence they were gathering — thanks to undercover cooperators — that in September 2014, then-Attorney General Eric Holder said he expected charges against individuals within months. The UK Serious Fraud Office also found it difficult to make cases against currency traders and announced in March that it was dropping its efforts.
The two allegedly conspired to take advantage of inside information about an unidentified company’s plans to sell part of its stake in an Indian subsidiary, according to the complaint. The client was Cairn Energy Plc, which was selling the unit to Vedanta Resources Plc, according to people with knowledge of the transaction. HSBC was hired to trade about US$3.5 billion in proceeds of the sale to pounds. Johnson and Scott began buying pounds in the days before the transaction, anticipating that they would cause the price of pounds to spike — a practice known as “ramping” — then executed the transaction, making the pounds they’d bought earlier more valuable, according to the complaint.

Extradition Concerns
Both men are British citizens. The complaint was kept under seal for fear Johnson, a resident of both the US and UK, would flee if he heard about it. Agents moved quickly to arrest Johnson to avoid difficulties that could arise in extraditing him, according to a person with knowledge of the matter. HSBC wasn’t made aware of the plans to arrest Johnson, another person said, asking not to be identified because the details aren’t public. “The irony of this case, your honor, was that he was in the process of being transferred by his employers from London to the US,” Johnson’s lawyer, Frank Wohl, told the judge on Wednesday.
“He has spent the last few weeks preparing to move his wife and six children to the US.”
The 50-year-old was ordered to surrender his passport, and Magistrate Judge Lois Bloom told him to have no contact with Scott or any witnesses in the case, saying: “You’re under a microscope.”
Scott, 43, left the bank after it agreed to pay $618 million to settle currency-rigging investigations by the U.K. Financial Conduct Authority and the U.S. Commodity Futures Trading Commission.
‘Element of Surprise’
Scott and Johnson told the client the deal should take place at 3 p.m. “so there’s an element of surprise” to get a better rate, according to the complaint, which quoted from recorded phone calls and messages between the two and their client. There was less liquidity at the 3 p.m. fix than the one at 4p.m., making it easier to manipulate, though they told their client they were about the same.
They and other traders they directed ramped up the price, sending the pound to its highest in two days at 2:56 p.m. London time. When Scott told Johnson the client was still going ahead with the full transaction despite the spiking price, Johnson said “Ohhhh, f***ing Christmas,” according to the complaint.
Johnson and Scott blamed the pound’s rise on an unidentified Russian bank in their conversations with the client afterward, according to the complaint.
Contact information for Scott wasn’t immediately available in U.K. directories, and the Brooklyn prosecutors didn’t have a lawyer on record for him.
Guilty Pleas
Johnson’s arrest comes more than a year after five global banks pleaded guilty to charges related to the rigging of currency benchmarks. HSBC, though it settled regulatory cases, is still being investigated by the Justice Department. The bank has set aside $1.3 billion for possible settlements, according to an August filing.
The Justice Department’s investigation into the manipulation of currency markets by the world’s biggest banks has looked at two issues: whether bankers from competing institutions colluded to sway benchmarks in their favor in violation of antitrust laws and whether bankers were committing fraud with client orders. The charges against Johnson and Scott were brought by federal prosecutors in Brooklyn and the Justice Department’s fraud section in Washington.
Separately 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 a statement Tuesday. That matter is separate from the one involving Johnson and Scott.
Gardiner has been helping U.S. prosecutors who are trying to build currency-rigging cases against individuals for violation of antitrust laws, two people familiar with the matter told Bloomberg News in April. He hasn’t been publicly charged and it isn’t clear if he has been granted immunity for cooperation. A lawyer for Gardiner didn’t respond to an e-mail seeking comment.