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)

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