As former HSBC FX cash trading head Mark Johnson takes his case to the US Supreme Court, ACI – The Financial Markets Association (ACI FMA) has filed a second Amicus Curiae to support his efforts to have his case heard and conviction overturned. Additionally, the New York Council of Defense lawyers (NYCDL), a not-for-profit professional association of approximately 350 lawyers, including many former federal prosecutors, whose principal area of practice is the defence of criminal cases in the federal courts of New York, has also filed in support of Johnson’s case.
Johnson was found guilty of eight counts of wire fraud and one of conspiracy by a New York jury in 2017 relating to HSBC’s execution of a hedging transaction on behalf of UK company Cairn Energy in which the bank pre-hedged and executed the trade at the 3pm WM/R Fix. He was sentenced to two years in jail in 2018 and lost a subsequent appeal against the conviction in 2019.
As part of the appeal process, ACI FMA was one of two parties to submit briefs in support of Johnson, it has returned to the case with an updated document that highlights the potentially negative impact on the US FX market as well as the “incongruous application of the “right to control” theory” that “creates a minefield of unforeseeable legal outcomes for counterparties to transactions with even marginal connections in New York”.
The brief states it is “highly implausible” that Johnson could have believed his bank’s handling of the Cairn fix order contravened any governing contract, law, regulation or ethical market standard. “On the contrary,“ it states. “He had every reason to believe that his actions were in accord with longstanding and widely published market codes of conduct.”
The Amicus also argues that the conviction was upheld upon a single “promise” uttered by Johnson which was explicitly disclaimed by subsequent written agreements prior to the trade, and that given the lack of actual or potential economic harm to Cairn, “is a model presentation of the problem”. It continues by warning that unless the Supreme Court takes up and reverses Johnson’s conviction, this will represent “a blow to freedom of contract and legal certainty with far-reaching effects for US financial markets”.
Specifically, the Amicus observes that the “minimal” US connection with the Cairn-HSBC trade means that upholding the conviction is likely to lead to non-US businesses closing US dealing operations, driving jobs and business offshore. “Unless the Court acts to restrain the prosecutorial expansion demonstrated by this and other recent cases, the cost will continue to be borne by the US economy and transactional counterparties using FX markets to hedge risk,” it states.
The Amicus argues that Johnson could not have been aware of the “novel and ambiguous” standards of conduct imposed by the conviction and cites the use of ISDA Master Agreements to support the transaction, which use is “almost universal” in FX and other OTC markets. “The circuit court affirmed [Johnson’s] conviction based solely upon the “right to control” theory, and did not address “misappropriation,” or the “fiduciary” or similar relationship of “trust and confidence” that theory requires,” the amicus states. It adds that banks give careful and specific consideration to the boundaries of written disclosure and fiduciary liability in assessing their service model.
“Standard ISDA disclaimers, upheld in most jurisdictions, are viewed by banks and dealers as essential to defining their legal risk,” it continues. “Given the allegations upon which [Johnson’s] conviction was based, it can only be expected that banks will either avoid similar service models entirely or demand a premium on transaction costs to compensate for the implicit legal uncertainties.”
The latest Amicus also reiterates an area that some in the FX industry felt was understated in the original case and appeal – what various codes of conduct say about executing Fix trades. It argues that conduct guidelines such as those in the ACI Model Code and more latterly the FICC Markets Standards Board and FX Global Code (the latter supported very publicly by central banks and other global authorities) “provide more than tacit acceptance of HSBC’s method of handling the fix order”, and that they explicitly permit “sourcing liquidity in anticipation of customer needs or hedging or mitigating exposure resulting from a client order”.
Interestingly, the Amicus also opines that Cairn’s behaviour around the transaction exposed it and HSBC to potential losses – specifically that it failed to adhere to the written agreement that it would give HSBC two hours’ notice of the order and also that knowledge of the impending transaction was widespread thanks to media coverage (the Amicus also references a media article in ZeeNews India in which Cairn apparently apologised to the Indian government for the deal leaking to the media).
ACI FMA also references the fact that the US Treasury explicitly omitted FX from the definition of a “swap” under Commodity Exchange Act, largely because FX markets already trade in a liquid and transparent manner. “In sum, the Court is urged to consider that [Johnson] was prosecuted for conduct between banks and their largest customers which Congress and the US Treasury Department have determined need not be subject to the antifraud provisions of the Commodity Exchange Act,” the Amicus states. “And indeed, no conviction would have resulted even had they been applied.”
In a final argument, ACI FMA, which submitted the Amicus in the interests of its members, observes that the conviction, unless overturned, “will have continuing detrimental consequences for US FX markets and participants”.
Specifically, it refers to the likely reluctance of bank FX dealers to operate in the face of potential criminal sanctions, and states, “Should this reticence become widespread, the implications for FX markets in the United States are substantial. Indeed, negative trends in FX liquidity, volatility and transaction costs, most dramatically in settings featuring elements of the Cairn transaction – British pound versus US dollar trading in US money centres near fix windows – have been observed and documented since this matter was publicised.”
It continues by citing data from the FX committee semi-annual FX turnover surveys in the US and UK, as well as from the Bank for International Settlements’ Triennial Survey of FX Turnover. The Amicus shows that between April 2016, the survey before Johnson’s indictment, to April 2019, spot FX turnover in the US fell by 20%, whereas in the UK it rose by 1.2% over the same period.
Similarly, it points out that the change is even more marked when it comes to sterling trading, Cable volumes fell 37.7% in the US over that three-year span, but rose 10.7% in the UK. The BIS survey, the Amicus notes, shows the US share of FX trading falling by 2,4% while the UK rose 2.3%.
The Amicus concludes by arguing that Johnson’s conviction is based on “an over-reaching application of already broad federal wire fraud statutes to conduct that, in accordance with the undisputed facts on record, [Johnson] had every reason to believe was permitted by freely-negotiated governing contract, law and regulation specific to his industry, and codified ethics standards.
“If permitted to stand, the conviction not only represents an individual injustice, but will leave intact a material circuit split and perpetuate a continuing market-wide negative impact upon US markets and liquidity end users.”
NYCDL Cites “Right to Control” Concerns
In its Amicus, NYCDL says it is filing because the “right to control” doctrine challenged by Johnson in his first appeal, “directly implicates NYCDL’s core concerns with combatting the unwarranted extension of criminal statutes and promoting clear standards for the imposition of criminal liability”.
NYCDL argues that to be prosecuted under the federal wire fraud statute, a defendant must seek to “obtain . . . money or property” through fraud, adding, “This is the statute’s sole purpose. It does not empower federal prosecutors to “set standards of disclosure” that then can be enforced through the blunt instrument of the criminal law.”
In a document rich in legal technical detail, NYCDL highlights how the US Court of Appeals’ Second Circuit’s definition of right to control “cannot be reconciled with a long line of decisions of this [Supreme] Court”.
NYCDL also says it is submitting the amicus curiae brief for an additional reason, namely, “the right-to-control doctrine is part of a broader pattern of overcriminalization and prosecutorial overreach that has taken hold in the Second Circuit, where many of the most significant white-collar and financial fraud prosecutions in the nation are initiated, in recent years.
“To demonstrate that overcriminalization is not hypothetical, NYCDL describes herein high-profile, high stakes fraud prosecutions pursued in recent years, some grounded expressly in the right-to-control doctrine,” it continues. “The wire fraud prosecutions are far afield from what this Court has defined as wire fraud: a case in which a person makes a false representation in order to fraudulently obtain for himself another person’s property.”
It argues that Johnson faces imprisonment not because he sought to deprive his counterparty of property, but because a jury found that he “intended to deprive [his counterparty] of information ‘that could impact [the counterparty’s] economic decisions.’ Furthermore, “Merely depriving someone of information, in the absence of any contemplated harm to money or property, is not, and ought not be, a crime.”