And so, Mark Johnson’s battle to have his conviction overturned moves onto the next chapter with a petition for either a re-hearing by the original appeal court panel or by the entire appeals circuit bench – and it is to be hoped that enough of the judges concerned see the absolute need for such a thing and that it is granted.

Someone recently suggested to me that they thought Johnson’s case had largely been forgotten since he lost the appeal – I was quick to respond that was definitely not the case, just a week or so ago a senior market participant and I had a very impassioned discussion over what that person termed the “travesty” of his conviction. I suspect what my original correspondent is picking up upon is the feeling of helplessness that engulfed most of us when the appeal failed. With Friday’s petition, there is room for hope once again and, if it can be managed in any way, support for Johnson’s position from an industry that still sits on the edge of a calamitous precipice if nothing happens.

That may sound dramatic, but let me put it in these terms – the appeal panel’s decision sets a legal precedent for a party unhappy with their execution to withhold payment. Can anyone imagine what chaos would ensue if an innocent and transparent execution goes horribly wrong because it runs into another order? Suppose for a second that a customer has a bank buying $3 billion-Swiss but another bank also has an order to buy $2.5 billion? The two banks try their best to buy the dollars, inadvertently run over the market, which spikes higher and we have two customers unhappy with their end rate (they were holding the market risk remember) and no way for either bank to explain what went wrong in the absence of macro or geo-political news or accessible trade data. In those circumstances, if one follows the logic of the appeal panel, those customers can refuse to settle the trade and be perfectly in their right – even though existing market legal documentation says otherwise.

As the petition points out, the Federal Reserve and SEC have both warned of the dangers of such an approach and personally I think they used understated language. The true risk from such a decision standing is an absolute breakdown of trust in markets – counterparties will no longer be able to rely upon each other settling the trade which will make them more reluctant to trade, reduce already strained liquidity conditions further, and of course, ultimately hurt the end customer. Even in exchange-traded markets there has to be an element of trust, maybe not between the counterparties, but between them and the CCP certainly. In OTC markets, which remain the best method for most end users to hedge their exposures accurately and without introducing more micro risks, trust is an absolute must have.

I also believe those judging the rectitude of the petition should consider how there appears to be a fundamental lack of evidence that Johnson actually lied to the client. I know not everyone agrees with me, but I do have the odd issue with what might be termed ‘mis-statements’ from HSBC, but none of them came directly from Johnson. If the prosecution is going to argue about nuances in Johnson’s defence and cherry pick their evidence (as is their right, it is how the legal system works and everyone knows it), then perhaps they should be more open to their own mis-steps.

I am about halfway through re-reading every piece of documentation I have on this case (luckily I have a couple of long flights coming up to finish it off) but as far as I can tell the only statements that were less than accurate were from someone from the debt capital markets  sales team (who had no work connection with Johnson and was definitely not the latter’s responsibility), who initiated the story about the Russian central bank (this was repeated later on but not by Johnson); and the statement that HSBC started buying at 2.55pm, when it was buying earlier.

Neither are ‘material’ to use the legal wording, because neither came from the lips of Mark Johnson. He did say on a call with another colleagues at HSBC, that when asked why the market jumped during the latter part of the execution, “And we said the usual, Russian names, other central banks, all that sort of stuff,” but I want to stress the word “we” there. It wasn’t “I said”, it was “we said” – that doesn’t mean that Johnson “misrepresented” or “lied” to the client (and actually what he said was accurate – central banks were at the time systematic sellers of dollars).

Someone who understands markets will also know that the news was already out there in terms of the deal – at least eight other banks would have known that Cairn was looking to execute that trade, they didn’t have the timing but the longer it took someone, in this case, HSBC, to buy the sterling, the greater the chance one of them would twig to what was going on. There are, therefore, several factors that may have contributed to the market’s rise.

This also brings me to another point and at this point I will digress in a strange direction. I have been taking dancing lessons for some time now and at the weekend was having real trouble understanding what my instructor wanted – mainly because I thought I was doing it. It turned out that she and I were talking about two totally different steps because I didn’t know the technical language and made an assumption we were talking about the same step.

Why do I raise this? To highlight the use, and misunderstanding, of the word ‘ramp’ in the Johnson case.

To ramp in FX professional terms is, I would argue, to deliberately and unduly pressure the market, hence Johnson repeatedly said the market wouldn’t be ramped and, in spite of what the prosecution stated and, amazingly a jury and appeal panel accepted this, he explicitly warned his trader not to ramp the market. The prosecution, jury and appeal panel appear, however, to associate the word with any upward movement in the market, when it clearly should not be. This demonstrates something I and many others have argued since this trial started to go wrong for Johnson, there is a fundamental lack of understanding as to how markets work, but it is ignored in the chase, on the government’s part, for a trophy head.

I don’t know how many times it has to be said, but hopefully it will be again and again until the panel or entire bench in the US understand it, buying that amount of sterling will send the price higher – Cairn knew that, Rothschilds, their advisor, knew that; the only people who don’t appear to know or accept it is the prosecution team and those judging the case. This is not meant to be a harsh reflection on those judging, they are not experts, rather it is a frustration that somehow the message hasn’t got through – although I would have to ask why the enormous doubt that exists in this case has not led to an acquittal. Perhaps more market experts should be rolled out to explain exactly how things work? I am not sure of the answer, but one needs to be found if the market is to avoid a potentially second operational crisis.

What is this other crisis? Well, in the evidence Johnson, when talking to the client about how an execution would go spoke of an “ideal world scenario”. The prosecution, as one of its many twists and turns in its efforts to find something to nail Johnson on, has taken this as a firm business promise. If we are now in a situation wherein casual comments represent a firm undertaking then who is going to engage with a customer that may be struggling to get the vital advice they need, possibly quickly, to protect their business? No one will give advice until the banks of lawyers have looked over the agreement, and the okayed the statements that can be made to said client, and that will take time – too much time for some customers. In this scenario, as in the case of a customer being able to refuse to settle a trade, ISDA agreements will become irrelevant, every transaction will likely have to have its own agreement, especially if any advice is sought.  As the appellant team argues, if the conviction stands on grounds of ‘scienter’ (the knowledge that the act about to be committed is wrong) then “few negotiating parties are safe from prosecution.”

In these circumstances, who is going to engage with that client? The buy side is already (inadvertently in many cases) taking on more market risk than ever, this will make it an absolute – and the result, at some stage, will be a financial disaster for someone.

In a broader sense, there is considerable disquiet in the industry over how the US is prosecuting many of the cases brought against financial markets participants. In the Johnson case I have highlighted before how the government’s argument changed when it was faced with an appeal, specifically it accepted that some of its original claims were wrong but introduced others. Elsewhere we have seen cases dismissed by judges who have been scathing of the government’s approach – the latest being the Libor judgement last week in New York in which a district judge, while sanctioning both defendants, declined to send them to jail because the government was treating the two men as “proxy wrongdoers”. If that doesn’t highlight an approach that says “we want a head, any head” I don’t know what does, and to me that is not a fair and balanced approach and smacks of anything but innocent until proven guilty.

Going back to Mark Johnson, his fight is the industry’s. If the judgement stands then we risk legal uncertainty disrupting the functioning of markets, at the very least it could make conditions very hard for US companies trying to hedge their risks and bifurcate the market along jurisdictional grounds. I continue to believe that he should not have been found guilty and that the technicalities upon which his appeal failed flew in the face of sensible market functioning. I do understand the feeling of helplessness that many express over the conviction, but if possible the industry needs to redouble its efforts to help him win his freedom. If it doesn’t, or this latest step fails then all I can say is click here, and then you will understand the true sense of the horror he, and possibly others further down the road, will (wrongly) face.

Twitter @lamboPnL

Colin Lambert

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