By Katie Martin, Chiara Albanese and David Enrich
LONDON--The U.S. Justice Department is investigating allegations
that an employee of HSBC Holdings PLC leaked confidential client
information to a major hedge fund, according to people familiar
with the matter, a new twist in a cross-border government probe
into misconduct in the foreign-exchange market.
U.S. prosecutors are interviewing HSBC traders about the alleged
event, which is believed to have taken place in March 2010, as part
of their broader criminal investigation into improprieties in the
currencies markets, these people say.
The alleged event, which HSBC self-reported to U.S. and British
authorities and is being examined as part of a U.S. criminal
investigation, happened when HSBC was advising a major client,
British insurer Prudential PLC, on a huge acquisition and was
working on a related multibillion-dollar currency transaction.
U.S., British and Swiss regulators this month imposed a total of
$4.3 billion in penalties against six banks, including HSBC, for
failing to stop employees from improperly sharing confidential
information with rival banks and for attempting to boost
currencies-trading profits at their customers' expense. HSBC and
the other five banks didn't dispute the regulators' findings. HSBC
said at the time that it "does not tolerate improper conduct."
The focus of the latest HSBC investigation suggests that the
U.S. is eyeing a new front in the currencies investigation:
market-sensitive information that banks may have shared with
favored clients, not just fellow banks. It also introduces the
prospect that actions by bank traders might have contributed to
sharp swings in currencies.
The events in question surround HSBC helping Prudential sell
billions of pounds and buy billions of dollars to finance the
insurer's planned $35 billion acquisition of the Asian
life-insurance unit of American International Group Inc.
HSBC, one of the world's largest currencies-dealing banks and
one of Prudential's advisers on the Asian deal, was working on the
large currency exchange on March 1. A senior HSBC trader allegedly
alerted a trader at hedge fund Moore Capital Management LLC, a
prominent New York hedge fund founded by investor Louis Bacon,
about the impending transaction. The planned merger was public at
the time but in these situations, profiting from any related
currencies deal requires a detailed understanding of the size and
timing of related trades.
The HSBC trader also allegedly sold large quantities of pounds
ahead of Prudential's order, they say, gaining a likely profit
given that he, and any other parties he allegedly had informed,
knew about the larger transaction for the bank's client.
That day, the pound plunged nearly 3% against the dollar. There
were no obvious triggers for the unusually sharp drop, leaving
befuddled traders and analysts searching for an explanation.
At the time, Simon Derrick, a senior currencies analyst at Bank
of New York Mellon in London, said "I would hesitate to say that
this is the start of a crisis. But does it feel like we're in the
next leg of the sterling downtrend that started in 2008? Yes."
One person familiar with the matter said it wouldn't be unusual
for a big bank to discuss orders with hedge funds and other trading
partners as it sought to complete a huge transaction in the open
market over the course of a day. In some situations, it can be a
useful way to help banks complete large transactions without
involving competing banks.
HSBC executives learned of the alleged incident as they
conducted an internal investigation into their foreign-exchange
activities, and disclosed it to U.S. and British authorities in
recent weeks, according to one of the people familiar with the
matter. As part of the bank's broader internal review, HSBC
suspended and later fired two traders, although neither specialized
in trading sterling, as the British pound is known, and neither was
involved in this alleged transaction.
The U.K.'s Financial Conduct Authority, one of the agencies that
investigated foreign-exchange misconduct, was aware of the
allegations and at least briefly looked into them, the people said.
The matter wasn't included in HSBC's settlement with the FCA
earlier this month and the FCA is no longer investigating the firm.
HSBC paid a total of about $620 million to U.S. and British
regulators as part of the recent deal.
Justice Department prosecutors are interviewing HSBC officials
about the trading around the Prudential currency exchange, the
people familiar with the matter said. But the trading is just one
facet of a broader criminal investigation, one person said.
The Justice Department is aiming to wrap up its foreign-exchange
investigation early next year. It has entered into preliminary
negotiations with some banks, which have until mid-December to
submit a full accounting of their foreign-exchange misconduct, The
Wall Street Journal reported this month.
There are high stakes in the currencies investigation for HSBC
and other banks. In 2012, HSBC entered into a deferred prosecution
agreement with the Justice Department as it paid $1.9 billion to
settle allegations that it violated anti-money-laundering laws. The
five-year agreement subjects HSBC to potentially greater penalties
if it is found to have violated U.S. law again.
"We don't believe it [the forex investigation] represents a
criminal act that would represent a breach of the DPA," HSBC Chief
Executive Stuart Gulliver said on a call with journalists earlier
this month.
Write to Katie Martin at katie.martin@wsj.com, Chiara Albanese
at chiara.albanese@wsj.com and David Enrich at
david.enrich@wsj.com
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