Ex-HSBC forex trader guilty of fraud
The US jury rejected Mark Johnson’s defence that ‘pre-hedging’ was standard industry practice, Caroline Binham, the FT's financial regulation correspondent tells Martin Arnold, banking editor. Music by Kevin MacLeod
Presented by Martin Arnold and produced by Martin Arnold, Caroline Binham, and Kevin MacLeod
From the Financial Times in London, I'm Martin Arnold, the FT's banking editor, and this is FT News.
A former top HSBC banker has been found guilty of defrauding a client in a $3.5 billion currency deal, a landmark legal decision that could have far-reaching implications for the workings of the foreign exchange market. With me to discuss the latest on this story is Caroline Binham, our financial regulation correspondent.
Caroline, tell us a bit about how the trial progressed and what the arguments from both sides were.
I think it's fair to say that there are a lot of nervous forex traders today in light of Mr. Johnson's conviction. It was a pretty speedy deliberation by the jury. They only took a few days to return the verdict and that was after only a three week trial which, by comparison to UK trials, was pretty speedy.
Essentially it was an old-fashioned front-running case. The prosecution alleged that Johnson breached confidentiality due to HSBC's client Cairn Energy. They were about to do a $3.5 billion currency trade and HSBC and Johnson and his traders essentially-- armed with that knowledge that the trade was about to go ahead-- ramped the price of pounds sterling, bought ahead of the trade and sold after, and therefore netted themselves a pretty handsome profit.
What Johnson's lawyer said was that actually this was a very conventional pre-hedging strategy which is widespread amongst currency dealers, there's nothing particularly wrong with that, and actually the US were trying to make something criminal that was pretty everyday practise.
Forex markets are renowned for being pretty lightly regulated and, as you said, the defence argued that this was a standard practise in FX markets to pre-hedge, particularly a sizable FX transaction like this. So what seemed to undermine the defence's case for Mr. Johnson?
On your first point, it's correct that it's back in 2011, which is when the trade happened, forex was a largely unregulated market. Obviously since then we've had the big forex rigging scandal-- banks paid about $10 billion worth of penalties as a result of that-- and Johnson's arrest at JFK airport was the DOJ's big success. However, it doesn't really have much to do with the rigging that the banks pay penalties for, and I'll come to that in a minute.
However, in terms of what undermined Johnson's case that this was a pretty traditional pre-hedging strategy was some of the e-mails and the phone calls that the jury heard and we can play some excerpts now.
Obviously you've got a bit of work to go, right? But I don't know what his average is. But as long as it's under that rate, they can't really complain much. If it's over 3730 they're going to squeal.
If it's over what?
If it's over-- Well it was around 5630 when they called us right? We spent most of the morning around 5620, 5630. So we should probably make sure we don't ramp it up through there. I don't know what his average is. I don't know how much they've got. Seeing that they're starting to bite--
No, you're kidding!
Yes. It's up 2 1/4.
[LAUGHS] Fucking Christmas. OK. All right. Good man. Thank you.
Those recordings of Johnson's comments seem to have been a pretty key factor in undermining the defence this was just standard practise pre-hedging, and in fact led the jury to believe that it was more front-running of the client's orders.
Now there is another element of this case, which is that Johnson's colleague-- or former colleague I should say-- Stuart Scott, is facing an extradition hearing in the UK later this week. The US are seeking to press similar charges against him, is that right?
Yes. Johnson was indicted with Stuart Scott. They are alleged co-conspirators. Things have got automatically a lot bleaker for Mr. Scott overnight. What's going to happen on Thursday is purely on the merits of the US government's extradition arguments. They're not going to be deciding whether Scott is guilty of the same charges as Johnson. It's purely whether the US government is correct to want to extradite him to the US to stand jury trial in the same way as Johnson.
However one of the arguments that a magistrate's court in this country will always deliberate over is the so-called foreign bar. Is this alleged wrongdoing a crime in both countries? They'll be looking at whether any other alleged co-conspirators have already been tried in that particular country. And obviously Johnson has been tried and now convicted. In that respect it doesn't look great for Mr. Scott. However he will, if he is extradited, face a jury trial in the normal way and it's always possible that that will return a not guilty verdict.
In terms of DOJ, it's a great philosophical win for them because they have had a few setbacks with transatlantic investigations of late. I'm thinking of the JPMorgan Whale case that they've had to drop in the libel rigging scandal, which obviously preceded that with forex. The only convictions that they've managed to secure against a couple of British former [INAUDIBLE] bank traders, those convictions have been quashed and that was over how evidence is shared amongst prosecutors and regulators on both sides of the pond.
They've also got this bigger case that emanates from the forex rigging scandal against the so-called cartel, and those are former traders of Citi, JPMorgan and Barclays. Those are the traders that wrote the emails that really became infamous during the forex rigging scandal.
In a way, they really don't have anything to do with Johnston's case at all beyond the word forex was in the DOJ's press release. It's going to be a much more interesting case to see how that progresses. Those cartel so-called traders haven't fought extradition though they're all British-based. They're going to try their luck in New York and they're currently having some pretrial hearings right now.
Yeah, and that's an antitrust case where they were allegedly colluding to try and move markets in their favour rather than specifically front-running their clients orders.
OK. All right Caroline, thank you very much.
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