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HSBC Bank Executives Face Charges in $3.5 Billion Currency Case
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Mark Johnson, center, following his arraignment, with his attorney, Frank Wohl, on Wednesday. Louis Lanzano for New York Times
The global banking giant HSBC has repeatedly found itself in the cross hairs of American regulators and prosecutors in recent years. To settle allegations of money-laundering and mortgage abuses, it has paid billions of dollars — but has not been criminally charged.
That has spurred an outcry that the bank is “too big to jail.” But now two senior executives of HSBC
of HSBC face criminal charges, accused of a currency manipulation scheme that federal prosecutors say generated $8 million in profits and fees.
The global head of HSBC’s foreign exchange cash trading desk, Mark Johnson, a Briton, was arrested by federal agents Tuesday night at Kennedy International Airport as he was boarding a flight to London.
He and Stuart Scott, the former head of the bank’s currency trading desk for Europe, the Middle East and Africa, were charged with conspiracy to commit wire fraud related to a transaction on behalf of a corporate client, exchanging dollars for British pounds.
The charges are a boon to the Justice Department, which until now has not mounted any cases against individuals in its wide-ranging investigations into currency manipulation by the major banks.“This case demonstrates the criminal division’s commitment to hold corporate executives, including at the world’s largest and most sophisticated institutions, responsible for their crimes,” said Leslie R. Caldwell, the head of the Justice Department’s criminal division.
The case against the two men resembles a conventional insider trading scheme, but with a twist because the defendants traded in currencies instead of stocks.
HSBC was hired to convert dollars into British pounds for a company as it was preparing to complete the sale of a subsidiary. The complaint does not identify the client, but it was Cairn Energy, according to a person with direct knowledge of the case who spoke on the condition of anonymity. Cairn, a midsize oil and gas company based in Edinburgh, was selling its Indian subsidiary to Vedanta Resources, an Indian conglomerate owned by the mining magnate Anil Agarwal.
The two HSBC executives are accused of using their knowledge of the deal to trade ahead of the $3.5 billion currency transaction, “ramping” up the price of one currency to benefit the bank at the expense of its client.
Document: Complaint and Affidavit in HSBC Case http://www.nytimes.com/interactive/2016/07/20/business/dealbook/21db-forex-document.html
The criminal complaint unsealed on Wednesday detailed conversations between Mr. Scott and Mr. Johnson discussing how high they could “ramp” up the price of the currency before the company would “squeal.”
In the Federal District Court in Brooklyn on Wednesday, Mr. Johnson, 50, was released on a $1 million bond secured by $300,000 cash and his house in Britain. A lawyer for Mr. Johnson did not respond to a request for comment.
It is unclear where Mr. Scott, who is 43 and also a British citizen, is currently located. The case is being led by federal prosecutors in the office of Robert L. Capers, the United State attorney in Brooklyn.
The criminal charges against the individuals follows a broader investigation of banks into alleged manipulation of foreign currency trading that federal prosecutors began about three years ago.HSBC was one of five banks to reach a combined $4.25 billion settlement in 2014 with United States, British and Swiss regulators over accusations that the banks had conspired to manipulate currency rates.
But HSBC was not among five banks that agreed last year to plead guilty to felony charges in connection with manipulating the price of dollars and euros. Those banks agreed to pay criminal fines totaling more than $2.5 billion.
HSBC has previously said the Justice Department is continuing to investigate the bank. It has set aside an additional $1.3 billion for further potential settlements, according to a filing last summer.
Robert Sherman, a spokesman for HSBC, which is based in London, said on Wednesday that the bank had been and would continue to cooperate with the Justice Department’s foreign exchange investigation.
While HSBC was not implicated in Wednesday’s criminal complaint, the case is another black eye for the London-based bank that has substantial operations in the United States.
In 2012, it paid $1.9 billion in fines to United States authorities to settle allegations of being a conduit for illegal money. The deal a deferred-prosecution agreement with the Manhattan district attorney’s office and the Justice Department.
The Justice Department’s decision not to criminally charge HSBC in that case received renewed scrutiny last week, when a report prepared by Republican staff of the House Financial Services Committee showed that prosecutors at the Justice Department wanted to criminally charge the bank, but were overruled by top officials in the department, including the attorney general at the time, Eric H. Holder Jr.
And HSBC paid $550 million in 2014 to settle allegations that it made billions of dollars of mortgage-backed securities appear to be compliant with regulations.The latest case stems from 2011, when HSBC was one of 10 banks that were invited to bid for the right to execute the currency transaction on behalf of Cairn Energy. Each competing bank was required to sign a confidentiality agreement.
In its bid submission, HSBC pledged it could “provide one quote for the full amount or even drip feed the market in the utmost confidential nature so as to ensure there are no sudden FX moves against the company,” according to the complaint.
But when HSBC won the bid in October of 2011, it did the exact opposite, the complaint says. After securing the lucrative job, a supervisor at HSBC told Mr. Scott on a call that the bank did not want to “push the market too much” higher “and at the same time we want to make money on this,” according to the complaint.
Mr. Johnson and Mr. Scott began to buy British pounds in exchange for other currencies, which they later sold for a profit to HSBC on the day of Cairn’s currency deal on Dec. 7, the government said. In a call to discuss the details of Cairn’s transaction with HSBC, Mr. Scott “falsely and fraudulently” advised representatives at Cairn on the best time of the day to execute the trade, according to the complaint.
When an adviser working on behalf of the company questioned Mr. Scott’s logic, he added that if traders in the market were aware of the transaction, “they will try to jump in front and start to muck around in the markets,” according to the complaint. Mr. Johnson also gave his own personal recommendation along the same lines.
Minutes after the call ended, Mr. Scott and Mr. Johnson began aggressively buying up pounds. When Cairn representatives did notice the sudden spike in the price of the British pound and asked HSBC, the person was told the spike in trading was the result of a Russian bank buying pounds at the same time as Cairn.
Mr. Johnson, according to the complaint, was surprised to learn that Cairn Energy decided to go ahead with the multibillion-dollar currency transaction, even as his trading in the markets had caused the price of the currency to soar to its highest point of the day. Responding to the news, Mr. Johnson replied, “Ohhhh, Christmas,” using an expletive as an adjective.