I have had a chance now to listen to the oral arguments given in the Mark Johnson appeal and while my underlying belief that this is a wrong conviction remains unshaken it is also clear to me that few involved in this case from the legal fraternity actually understand foreign exchange markets and how they are different to listed markets.
Obviously my knowledge of protocols and how to operate in the US legal system can be written (in capitals) on the back of a postage stamp, but listening to the judges challenge both sides I became frustrated by the repeated references to securities markets by the judges and the government’s counsel. I understand the judges were seeking to gain some perspective on conduct here, but the two models are radically different and understanding those differences is surely key to this case?
I sometimes think I must be missing something in this case because I am repeatedly surprised (and have been since I started writing about this) that Johnson’s team does not raise the issue of what would have happened if HSBC had tried to buy GBP 2.25 billion in one minute, and in December, the least liquid month of the year in FX markets. Anyone with knowledge of the market would know that the result would have been, barring a very lucky and highly unlikely coincidence of a matching sell order, carnage, and that would have cost Cairn a lot of money. To put that into perspective, it would mean buying around GBP 37 million per second in a market that trades around GBP 150 million per minute – you do the math.
Again though, there was no mention of this even when there was an exchange regarding how the sterling was bought. The US government’s counsel described how, in buying GBP 1.2 billion in the two minutes before the Fix, the market was “ramped” higher (and the word “ramp” is used liberally and not always correctly in this session), to the detriment of Cairn. Well to that counsel I would respectfully ask, “what do you think would be the result in the market if double that amount was bought in half the time?”
Listening to the oral arguments only reinforces my belief that the government is trying to retro-fit actions to fit a vague offence. There seems to be an acceptance that buying ahead of time was actually the only way to do the deal but the problem was how much money was made. I have written about this before, but again, how do we proscribe how much money should be made out of a deal? If I recall correctly then HSBC was said to have made something in the region of $8 million from the trade – this time I’ll do the math for you, it’s a fraction over 0.2%. Remind me once again, how much commission does the average person pay when they go to a bureau de change?
I wrote about one judge’s comment on Monday regarding an acquittal leading to a “wild west” scenario so I won’t go over that again, but I must confess to being a little surprised about the FX Global Code not being mentioned in those circumstances (there is limited time for presentations, however in these cases). Equally, it is pretty clear that the prosecution doesn’t understand tactics in dealing rooms by leading their argument with an alleged breaking of the NDA. This break occurred because the information was shared within HSBC on a limited basis. Counsel also returns to the old issue of codewords being used and here, as so often in the government’s argument, the main prop on which they lean is implication.
It is implied that the use of a codeword is evidence of wrong-doing, however if one is to keep certain information confidential then who doesn’t use codewords? It is implied that the NDA was broken even though several traders were used to buy sterling to keep market impact to a minimum – and I don’t recall it being accepted that the information never left HSBC, which it didn’t. On that latter point I would also respectfully observe that if you want to make an order public there is a very easy way to do it – buy it all in one minute!
There were other misconceptions as well. For example, Cairn was alleged to have been the “victim”, however it was not pointed out to the court that by using the Fix the customer owns the market risk. HSBC could have done nothing and tried to buy it in one minute, speared the market about 200 points (or much more) higher and the result would have been Cairn paying a higher price. If the market went lower before the Fix then Cairn would have received more sterling for its dollars – if that isn’t a definition of where market risk lies I don’t know what is?
It is hard to pick which way this appeal will go – I know which way I think it should, but the level of ignorance about how OTC markets work is a little concerning. Towards the end the judges appear to be focusing more on whether Mark Johnson lied deliberately to the client and frankly I don’t know how that can be proved. What is clear to me from listening to these arguments and reading the literature over the years is that, unlike as claimed by the government during the appeal process, Mark Johnson did not lie to the customer before they decided to place the deal with HSBC (and it should not be forgotten that he did not utter the line about Russian buying of sterling).
In terms of how the deal would be done, the need to pre-hedge and the fact that they were arms-length counterparties was made clear and that makes it obvious to me that Cairn Energy is no more a victim in this than I am. The company went to nine relationship banks during the RFP process – and that means nine other FX desks with knowledge of a large transaction in some shape or form as well as access to newswires who could have bought sterling – but the fact alone that it has that many would suggest it is a professional market participant.
Interestingly, I was not aware that Cairn only brought a civil case after Johnson was arrested – so for five years it was perfectly happy with what went on (and so, presumably, was their “advisor” Rothschilds). This all points one way for me, but as I have noted, I am less confident having listened to the oral arguments because I am not sure they put the key points across as forcefully as they could have.
This means, of course, that the wait goes on, for the FX industry but most importantly for Mark Johnson and his friends and family. All I can say is that I continue to get messages of support for Johnson, so here’s hoping that the appeal judges see the weakness in the government’s case and throw it out.