Federal prosecutors say fraudulent cash trades came at a
client's expense
By Christopher M. Matthews
When a top executive at HSBC Holdings PLC was told a client had
approved a huge currency exchange that stood to enrich the bank by
millions, federal prosecutors say he couldn't believe his luck.
"Ohhhh, f -- ing Christmas," replied Mark Johnson, the bank's
global head of foreign-exchange cash trading, according to a
transcript of a call recorded in 2011.
Now, his luck has turned. The details of the call were spelled
out in a criminal complaint unsealed by federal prosecutors in
Brooklyn on Wednesday, hours after Mr. Johnson was arrested by
federal agents at New York's John F. Kennedy International
Airport.
Prosecutors charged Mr. Johnson and a colleague, Stuart Scott,
the former HSBC European head of currency trading, of fraudulently
front-running a $3.5 billion currency trade for a client, in a deal
that netted millions in profits for the bank.
Mr. Johnson, 50 years old, appeared in Brooklyn federal court
Wednesday afternoon. He didn't enter a plea, and was released on $1
million bail. His lawyer declined to comment.
Mr. Scott, 43, hasn't been arrested. His lawyer, Richard Beizer,
didn't respond to requests for comment.
Mr. Johnson's arrest adds to a long list of legal woes for HSBC.
In the highest-profile case, 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 in 2012.
The crimes alleged Wednesday predate that settlement and are
unlikely to affect it, a person familiar with the matter said.
The bank also paid $614 million in 2014 to settle allegations it
rigged benchmark currency rates. Mr. Scott was fired shortly after
that settlement. The bank is still under investigation by the
Justice Department for alleged rigging of the foreign-exchange
market, and the charges filed Tuesday grew out of that probe,
people familiar with the matter said.
An HSBC spokeswoman said "HSBC has been and continues to
cooperate with the DOJ's FX investigation."
According to the complaint, Messrs. Johnson and Scott traded
before executing an exchange of about $3.5 billion worth of dollars
into British pounds -- proceeds from a sale of part of the client's
stake in an Indian subsidiary. The pair in late 2011 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.
The two men are each charged with one count of conspiracy to
commit wire fraud.
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.
The investigation into the two men and the bank is continuing,
one of the people familiar with the matter said.
According to the complaint, HSBC won the bidding to help the
victim company execute the currency conversion. The company planned
to convert the money to pounds and pay it out to shareholders.
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 went through with 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 diminishing the client's proceeds, because the
conversion to pounds was done at a higher rate.
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 pound in a way that wouldn't draw
suspicion from the client, according to the complaint.
"[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, the complaint said.
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 plan netted $3 million in trading profits and $5 million in
fees for HSBC, prosecutors said.
A report last 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
countries under sanctions and drug traffickers, allegations that
HSBC admitted to as part of the 2012 settlement.
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 investigation.
The charges are the first against individuals to come out of the
foreign exchange probe. 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.
Mr. Johnson's lawyer said in court Wednesday that HSBC was
actually in the process of transferring Mr. Johnson from the U.K.
to the U.S., and he was in New York making preparations for his
wife and six children.
--Margot Patrick and Aruna Viswanatha contributed to this
article.
Corrections & Amplifications
The criminal complaint against Mark Johnson was filed Tuesday,
before his arrest. A previous version of this article misstated
that the unsealing of the complaint Wednesday was before his
arrest.
Write to Christopher M. Matthews at
christopher.matthews@wsj.com
(END) Dow Jones Newswires
July 21, 2016 02:47 ET (06:47 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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