HSBC Jury to Weigh If Forex Trader Was Front-Running Order

HSBC Holdings Plc code-named a $3.5 billion currency trade “Project Shine” and swore traders to secrecy to reassure its client it would get the best price.

Mark Johnson, then head of global foreign exchange, was among those who knew and Cairn Energy Plc feared that news of the anticipated purchase of pounds would leak, U.S. prosecutors say. Instead, they say he bought sterling and tipped fellow traders, steps that gave HSBC a $8 million in profit in December 2011.

“Ohhh, f—-ing Christmas,’’ Johnson said as Cairn went on with the trade despite a rising price, prosecutors say.

Johnson, the first banker to go on trial following a crackdown on currency-market rigging, is accused of defrauding Cairn and breaching his duty to HSBC in what prosecutors say is a clear case of front-running. HSBC wasn’t named as a defendant in the indictment, but the bank itself has been under U.S. criminal investigation over currency trading and is in active talks with the Justice Department and U.S. regulators to resolve the matters, according to a July 31 regulatory filing.

Lawyers for Johnson are expected to argue that what he did was common in the $5.1 trillion-per-day currency market, by far the world’s largest. They have lined up witnesses to testify that HSBC’s traders provided best-execution for Cairn, and that related trades were standard hedging practices, according to court papers.

The trial began Monday in federal court in Brooklyn, New York, with U.S. District Judge Nicholas Garaufis questioning potential jurors. Johnson’s lawyers asked that jurors sign a pledge not to do internet research and also be questioned about the financial crisis and big banks. Garaufis rejected those requests saying jurors would be sworn to base their verdict solely on the evidence.

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Currency traders around the globe will be watching the case, wondering whether they need to change behavior. Traders’ compensation and incentives can lead them to test boundaries, risking sanctions or even criminal charges, said Mayra Rodriguez Valladares, a former foreign-exchange analyst for the Federal Reserve Bank of New York.

“The probability that you’re going to get caught is low,” she said. “They think this is the cost of doing business.”

Johnson’s arrest in July 2016 at New York’s Kennedy airport was a win for the Justice Department, which had struggled to build cases against individuals in its investigation into foreign-exchange manipulation. Then-Attorney General Eric Holder said in September 2014 that he expected charges against market participants were imminent, but none came. The U.K. Serious Fraud Office has dropped its effort to prosecute individuals.

The trial offers 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 improperly used testimony they were forced to provide to a U.K. financial regulator to build the U.S. case.

“Traders are always pushing the envelope, so would the government look to bring more of these kinds of cases if they win — I think so,” said Peter Henning, a former federal prosecutor. “They want to show the world that the U.S. is policing the market.”

QuickTake: Broken Benchmarks

No matter the trial’s outcome, the testimony is sure to be a black eye for London-based HSBC, the world’s sixth largest currency trader. The bank was among seven that paid more than $10 billion in fines to U.S. and European regulators for manipulating benchmark exchange rates. HSBC paid $618 million in 2014 for its role in rate rigging.

HSBC spokeswoman Melissa Cassar declined to comment, as did Johnson’s lawyers.

Johnson, 51, no longer works for the bank and denies wrongdoing. When he flew to New York from London almost six years ago, the father of six had reason to be bullish on the pound, according to court filings. Prosecutors say the bank had selected him to execute the order from Cairn, an Edinburgh-based oil and gas exploration and development company that sought to convert the proceeds from selling a unit to Vedanta Resources Plc from dollars into pounds.

HSBC told Cairn it would “drip feed” the market with its purchases so as not to drive up the price of sterling, prosecutors say. Instead, Johnson and Stuart Scott, then HSBC’s head of foreign exchange cash trading in Europe, filled the order using a technique that caused the price of sterling to jump. That benefited the bank’s trading book at the expense of Cairn, which paid a higher price for the U.K. currency, they say.

How High?

In a Dec. 7, 2011 phone call just before the trade, Johnson and Scott asked one another how high HSBC could push the price of sterling before Cairn would “squeal,” prosecutors claim. They then advised Cairn that the sale should take place at a time of day that would enable HSBC traders to secretly front-run, the U.S. says.

The case will take jurors into the high-pressured, 24-hour-a-day global currency business — warts and all. Johnson’s lawyers are likely to argue that pound purchases by HSBC traders before the Cairn order were just testing market liquidity and hedging. HSBC’s profit on the trades was “consistent” with hedging on “a transaction of comparable size and risk,” they wrote in court papers.

Scott, 44, was arrested in June in London and is fighting extradition to the U.S.

“There are no slam dunks here,” said Henning, a law professor at Wayne State University in Detroit. But celebrating with “‘F—ing Christmas’ at a client’s expense — that might be evidence of fraud.”

— With assistance by Tom Schoenberg

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