By Christopher M. Matthews
U.S. authorities arrested HSBC Holdings PLC's global head of
foreign exchange cash trading Tuesday night and charged him with
fraudulently trading ahead of a client's transaction, alleging he
and others netted millions in profits for the bank while lying to
the client.
Mark Johnson was arrested by federal agents Tuesday night at
John F. Kennedy international airport in New York, according to
people familiar with the matter. He is scheduled to appear in
Brooklyn federal court later Wednesday.
Mr. Johnson couldn't be reached for comment. His lawyer, Frank
Wohl, didn't immediately respond to a request for comment.
According to a criminal complaint, Mr. Johnson and Stuart Scott,
the former HSBC European head of currency trading, traded ahead of
a client's conversion of $3.5 billion to British pounds tied to a
pending sale of the client's Indian subsidiary in December 2011.
The pair used confidential information about the deal and the
conversion to make lucrative trades for themselves and HSBC, and to
the detriment of the client, prosecutors alleged.
In a conference call in November 2011 discussing the coming
transaction, an unnamed HSBC supervisor told Mr. Scott they should
ramp up the market for British pounds in a way that wouldn't draw
suspicion from the client.
"[W]e don't want...to push the market too much high[er] and at
the same time we want to make money on this," the supervisor said
on the call, according to the complaint.
Later, during a separate call, when Mr. Scott told Mr. Johnson
that the deal was likely going to go through, Mr. Johnson expressed
disbelief, according to the complaint. When Mr. Scott reassured
him, Mr. Johnson responded, "Oh, f---ing Christmas," according to
the complaint.
The charges are the latest headache for the London-based bank,
which in 2014 paid $614 million to regulators to settle allegations
it rigged foreign exchange benchmark rates. The bank is still under
investigation by the Justice Department for alleged rigging of the
foreign exchange market.
The case announced Wednesday grew out of that wider foreign
exchange investigation, according to a person familiar with the
matter. Additional charges could be brought against the two men and
other individuals at HSBC, another person familiar with the matter
said.
Messrs. Johnson and Scott weren't accused on Wednesday of
rigging exchange rates, the focus of the broader investigation, but
were instead accused of a practice commonly referred to as
"front-running."
In the days and hours leading up to the $3.5 billion
transaction, Messrs. Johnson and Scott stockpiled millions of
pounds in HSBC accounts, federal prosecutors alleged.
When the client completed the transaction in December 2011, the
two men executed it in a way that drove up the price of the pound,
according to the complaint. This allowed them to sell the currency
they had purchased at a higher price while devaluing the client's
sale proceeds because the conversion to pounds was done at a higher
rate.
The plan netted $3 million in trading profits and $5 million in
fees for HSBC, according to the complaint. The two men are charged
with one count of conspiracy to commit wire fraud.
Mr. Scott hasn't been arrested and couldn't be reached for
comment. He was fired by HSBC in 2014 following the bank's
settlement with regulators over foreign exchange rigging.
An HSBC spokeswoman declined to comment. HSBC Chief Executive
Stuart Gulliver told reporters in February that the bank continues
to beef up its systems and controls to keep out financial crime,
and that "we have no evidence there are bad apples within
HSBC."
Mr. Johnson's arrest adds to a long list of legal woes for HSBC.
In the highest profile case, in 2012, the bank avoided criminal
charges over money laundering by entering a $1.9 billion settlement
and five-year deferred prosecution agreement with the Justice
Department. A report this week by the Republican staff of a U.S.
House of Representatives committee found that former Attorney
General Eric Holder overruled an internal recommendation to
prosecute the British bank for having opened up the U.S. financial
system to sanctioned countries and drug traffickers, allegations
that HSBC admitted to as part of the 2012 settlement.
The crimes alleged Wednesday predate that settlement and are
unlikely to affect it, one of the people familiar with the matter
said.
More recently, HSBC was part of a global probe of banks'
activities in foreign exchange markets. Five banks paid billions in
fines and four pleaded guilty to criminal charges in May 2015 as
part of the Justice Department's piece of that global
investigation. In February, HSBC in its annual report said it was
still being investigated by the Justice Department and other
authorities over its foreign exchange trading.
According to the complaint, the victim company, which isn't
named, approached HSBC in 2011 about helping it convert $3.5
billion in sale proceeds from the pending sale of an Indian
subsidiary. The company planned to convert the money to pounds and
pay it out to shareholders.
Using confidential information provided by the client, Messrs.
Johnson and Scott plotted to carry out the transaction in way that
profited HSBC.
When the client noticed the price of the pound rising the day of
the transaction, Messrs. Johnson and Scott falsely blamed it on
purchases by a Russian bank, according to the complaint.
The charges are the first against individuals to come out of the
foreign exchange investigation. As previously reported by The Wall
Street Journal, prosecutors have used undercover cooperators and
had indicated as long ago as 2014 that charges were near. But
building cases has been a slow process.
Prosecutors had planned to charge Mr. Johnson at a later date
but moved to arrest him Tuesday evening because they feared he was
leaving the country, a person familiar with the matter said.
Agents from the Federal Bureau of Investigation and the Federal
Deposit Insurance Corporation took him into custody at the airport
around 7 p.m.
Margot Patrick contributed to this article.
Write to Christopher M. Matthews at
christopher.matthews@wsj.com
(END) Dow Jones Newswires
July 20, 2016 15:20 ET (19:20 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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