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HSBC Bankers Charged in United States Currency Case

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An HSBC Holdings Plc Executive was ready to fly out around 7:30 last Tuesday evening. 

He was surprised when Federal agents showed up at New York’s Kennedy airport and arrested him. 

He was arrested for allegedly taking part in a front-running scheme in 2011 that involved a three and a half billion-dollar currency transaction.

Mark Johnson was held overnight in a jail in Brooklyn.  

According to prosecutors, the global head of HSBC for foreign exchange and cash trading located in London was due for a court appearance that Wednesday.

The United States lead a complaint against both him and the former head of currency trading in Europe for HSBC, Stuart Scott. 

This act made them the first people to face charges for the long-running probe.

Building the Case

Both the arrest and the charges are simply a coup for the Justice Department. 

The Justice department has struggled with the task of conducting an investigation into foreign exchange trading that takes place within global banks and building a case.

At one time, United States prosecutors held a lot of confidence in the quality of the evidence they were finding, thanks to the use of undercover cooperators. 

They had so much confidence in this evidence that Eric Holder, the Attorney General at that time, had said he expected to be able to charge individuals within a few months’ time back in September 2014.

The Currency Investigation

Prosecutors have been targeting individuals on the basis that they might have been involved with manipulating foreign-exchange benchmarks.

Holder reported back in 2014 that undercover cooperation had taken place in order to help prosecutors build their case.

He said that cooperators often were able to provide evidence that there was an intent to commit fraud. 

He says that this evidence is critical in order to make a case that financial executives had committed illegal acts. 

A number of informants have assisted in the department’s investigations about the rigging of bench mark, insider trading, and interest rates.

The following shows how interest rate parity holding in the foreign exchange market is done. 

This is in the event that the returns on investment domestically equal those of investing abroad.

hsbc bankers 1

Holder stated that charging individuals deters criminal activity in a way that going after the companies involved cannot. 

The cooperation agreements that existed between the banks and the Justice Department helped provide a lot of information for the federal prosecutors working on the case.

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The Timeline

The United Kingdom Serious Fraud Office also had difficulties when trying to build a case against currency traders. 

In March, the Serious Fraud Office made the announcement that they were dropping the efforts they had made. 

Here’s how the benchmark probes unfolded:

  • 2008
    • Reporters from various newspapers began reporting concerns that the London interbank rate was being influenced.
  • 2010
    • The United States CFTC ordered banks to carry out their own investigations into practices
  • 2012
    • June
      • Barclays became the first bank to settle with regulators. He paid $450 million.  Bob Diamond, CEO, resigned
  • 2013
    • May
      • CFTC began interviewing various traders about ISDAFix
      • The European Union raided the BP and Shell in oil benchmark probe
    • June
      • Articles published by Bloomberg alleging that the occurrence of deceiving currency benchmarks was taking place.
    • November
      • The United Kingdom confirmed the review of benchmarks being used in the gold and silver markets.
    • December
      • European Union found out that nine banks were involved in a cartel aimed at rigging interbank rates. They were fined 1.7 billion euros
  • 2014
    • November
      • Six banks agreed to pay United States, Swiss, and United Kingdom regulators $4.3 billion. This was the currency probes’ first settlement.
  • 2015
    • April
      • $2.5 billion paid by Deutsche Bank in order to settle with United Kingdom and United States Libor probes
    • May
      • $5.8 billion paid by 6 more banks in order to settle a currency-rigging case with the United States Justice Department
    • August
      • Tom Hayes was the first trader to be tried and convicted of Libor-rigging
  • 2016
    • January
      • 6 brokers are acquitted from charges accusing them of helping Hayes
    • March
      • The United Kingdom dropped the criminal investigation they were conducting to find individuals accused of currency rigging
    • July
      • Former Barclays traders are found guilty of Libor rigging

The following shows how swap payments work between the banks and different clients:

hsbc bankers 2

Leslie Caldwell, the Assistant Attorney General, emailed a statement saying that the case illustrated the commitment of the criminal division to hold corporate executives responsible for the crimes they had committed. 

She specifically stated that this commitment included the world’s most sophisticated and largest institutions.

Below is a visual representation of how a realistic triangular arbitrage scene should work. 

Sample bids and ask prices quoted by banks are used.

hsbc bankers 3 

Accusations?

Scott and Johnson are accused of conspiring to take advantage of inside information they had acquired about a company deciding to sell some of its stake in an Indian subsidiary. 

They didn’t not know which company it was.

According to people who were aware of the transaction, the company was Cairn Energy Plc. 

It is said that they had planned on selling to Vedanta Resources Plc. 

HSBC was hired in order to trade around $3.5 billion of the proceeds from the sale to pounds.

Johnson and Scoot began by ramping

This means that they bought pounds’ days before the transaction to take place so that they could cause the price of pounds to rise. 

The complaint says that once they bought the pounds, they executed the transaction, and the pounds that they bought before carrying out the transaction thus became more valuable.

SURPRISE!

The complaint states that Scott and Johnson informed the client that the deal should take place around 3 p.m. 

They told the client that this would provide an element of surprise and allow the client to get a better rate.

When 3 p.m. rolled around, there was less liquidity available than at 4 p.m. 

This made the act of manipulation easier. 

It should also be noted that they informed the client liquidity at each point was around the same.

Johnson, Scott, and the traders they told to do so, all ramped the price. 

The pound reached the highest it had in two days at 2:56 p.m. in London. 

Scott informed Johnson that the client was going to go ahead with the full transaction despite the fact that the price had spiked.

It is reported in the complaint that Johnson responded to this by saying the un-censored version of Oh f’ing Christmas. 

When all was said to done, HSBC and the internal accounts for both Scott and Johnson reaped around $8 million for this front-running, according to Robert Capers. 

Robert Capers is a U.S. Attorney in Brooklyn.

It is said that the defendants not only allegedly betrayed the confidence of their client, but also manipulated the foreign exchange market in order to reap rewards for themselves and the bank they worked for, according to Caldwell. 

The complaint says that Johnson and Scott told their client in following conversations that an unidentified bank in Russia was responsible for the rise of the pound.

An HSBC spokesman, Rob Sherman, and a Justice Department spokesman, Peter Carr, both refused to comment on the situation.

Johnson and his lawyer did not respond to calls requesting comments immediately. 

Frank Wohl is Johnson’s attorney. 

Scott’s contact information was not readily available in the United Kingdom directories.

Concerns?

Both Johnson and Scott are citizens of the United Kingdom. 

According to the document, because there was fear that Johnson and a resident of bot the United States and the United Kingdom would run if they found out about the United States complaint, it was kept under seal.  

Federal agents were quick to move in order to arrest Johnson.

Johnson works in London and in New York. 

The agents moved quickly so that they could avoid any issues that might arise as they tried to extradite him, according to an informant who has information on the issue.

The HSBC was not made aware that there were plans made to arrest Johnson.

The person who provided this information asked to remain anonymous because these details have not been released to the public.

Scott left HSBC back in 2014 after the bank agreed to pay $618 million in order to settle currency rigging investigations conducted by the United Kingdom Financial Conduct Authority and the United States Commodity Futures Trading Commission.

Scott, 43-years-old, is still in the United Kingdom. 

According to one source, it is expected that the United States is going to try and extradite him back to the United States to face charges.

Johnson’s arrest follows over a year after five global banks plead guilty to charges of rigging the currency benchmarks. 

The Justice Department continues to investigate HSBC, regardless of the fact that HSBC settled regulatory cases. 

$1.3 billion has been set aside by the bank, according to a filing in August, in order to cover possible settlements.

The following shows total fines paid by banks up to now:

hsbc bankers 4

Fraud

The investigation conducted by the Justice Department looked at the world’s largest banks and the manipulation of the currency markets has primarily focused on two issues:

  • It has looked at whether or not bankers from competing institutions colluded to sway benchmarks in their favor. This would have violated antitrust laws.
  • It has looked at whether or not bankers were taking client orders and then committing fraud.

Federal prosecutors located in Brooklyn teamed with Washington’s Justice Department’s fraud section to bring the charges against Scott and Johnson.

In Other News

Last Tuesday, Matthew Gardiner was banned by the United States Federal Reserve for life from anything to do with the banking industry. 

Gardiner was banned for his role in rigging currency benchmarks. 

Gardiner is a former UBS Group AG trader.

Gardner utilized chat rooms online in order to facilitate his part of rigging benchmarks and to disclose customer information that was confidential to traders located within different banks, according to a Federal Reserve statement made last Tuesday. 

The names that Gardiner used in these chat rooms included The Cartel and The Mafia.

The statement said that the bank stated that the Fed was prohibiting a former foreign exchange trader from participating in the banking industry. 

It further stated his name and what he was accused of. 

It says that he engaged in practices that were unsafe and unsound.

People are saying that the situation with Gardiner is different from the situation with Johnson and Scott.

In April, two people that are familiar with what is going on told Bloomberg News that Gardiner is currently assisting United States prosecutors that are trying to build cases against individuals they suspect are guilty of currency-rigging. 

They are aiming at charging them with violating antitrust laws.

Gardiner has not been charged publicly at this time. 

This makes whether or not immunity was granted in return for his cooperation unclear. 

An e-mail was sent to Gardiner’s attorney requesting comments, though the attorney did not respond.

The Fed Cracks Down

In April, reports came that United States officials were getting ready to charge a number of manipulators during the summer. 

The fed has recently been belligerent over the past few years when it comes to punishing individuals engaging in this activity.

Goldman Sachs Group Inc. barred on of their employees last year because they were stealing information from the market. 

Credit Suisse Group Ag barred five employees for helping their clients get out of paying taxes.

The six banks who were fined last year had to agree to investigations against their employees and are prohibited from re-hiring or communicating with individuals that had conducted these activies.

Gardiner was part of an instant messaging group known as the Cartel. 

This was at the center when five banks plead guilty to charges last year, according to people familiar with the situation.

United States said traders who were working for the institutions that were convicted in 2015 had conspired to fix currency benchmarks by using this instant-messaging group. 

This group was originally called the Mafia. 

These banks were:

  • Citigroup Inc.
  • UBS
  • JP Morgan Chase & Co
  • Barclays Plc
  • Royal Bank of Scotland Group Plc

 

Enforcement actions were brought over the manipulation of currency by the Fed last year against Barclays Plc and UBS. 

Gardiner used to work at Barclays Plc. 

This enforcement resulted in Barclays and UBS paying penalties that equaled up to $684 million, according to the Fed.

The following chart shows the 2008 annual report on the common equity to assets ratio for the four largest U.S. banks:

hsbc bankers 5

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