There was a burst of correspondence following the news late last week that for EM FX trader Ashkay Aiyer had received a fine and a jail sentence for his role in what can generically be called the chat room scandal – some were questioning how his sanction sits against that for Mark Johnson, while others asked me why I hadn’t been as vocal in the former’s defence as I have been about the latter’s. So, let’s get down to it.
First up, I don’t believe either man should be going to jail; I find the sentences over-the-top and unnecessary – neither man is anything approaching a threat to society so why are they to be removed from it? There are some who clearly believe that, to quote Voltaire (and yes, that is the first time this column has cited a French philosopher), it is “pour encourager les autres” but I think the sheer number of people that lost their jobs thanks to the scandal got the message home to traders, and the number of zeroes on the fines ensured the banks put their culture right. Throw in the FX Global Code, which still has some hold outs in the industry regarding its true effectiveness it has to be said, and you have a changed industry. I honestly think people find the threat of a career ending dismissal a big enough deterrent – especially in the current economic climate.
Comparing the two sentences is much more difficult without a detailed knowledge of the US legal system, and after the absurdity of Johnson having an appeal dismissed just days before the same court allowed another appeal on the same grounds, I am even more in the dark than ever. It is hard, however, not to look at a political angle to all this – the DoJ wanted a high profile head to mount on their wall and, with all due respect, a humble spot trader wasn’t enough, they wanted a ‘global head of…” and that means Mark Johnson is their main target. Sadly for him and his friends and family, he is the trophy the DoJ is hunting (and there are those that think him being a foreign citizen working for a foreign bank is rather convenient).
One factor in the different sentences could be that the DoJ managed to convince the jury of a dollar number that Cairn Energy allegedly “lost”. Professionals in the FX market will tell you that is a ridiculous assertion – one aspect of this case I have banged away at for years is what would have happened if HSBC had executed the way the DoJ argued, i.e. in one minute? Not only could it not physically have been done, but the cost of executing it over two or three minutes could easily have been above $100 million (not the $7.5 million DoJ managed to convince a jury of) and you suspect the DoJ finally realised this when it changed its tack entirely for the appeal. In Aiyer’s case, as in all the chat room-related lawsuits we have had, it is nigh on impossible to pin down a dollar amount that can be apportioned to the individual.
There is another factor that differentiates the two cases and this is where I relate why I have not been as noisy in my defence of the chat room defendants as Johnson. If you asked 100 FX trading professionals how they would have executed a £2.25 billion order at a Fix (in the one minute era remember) then 100 of them would say spread the order out (and if they are from the modern era they would use the phrase so distasteful to my generation “pre-hedging”).
If you asked the same 100 whether it was OK to share details of client orders, a large majority (I am not so naïve to suggest it would be 100%, although it might be in the Code era) would say it is not. Yes there are nuances involved – Johnson spoke directly to a customer whereas the chat room people were not interacting with the client to any great degree – but the fact is one group conducted themselves in a manner that pretty much all knew was wrong (and I acknowledge for a lot of them it was under direction from management), whereas the other did what? Stayed silent when a colleague apparently made up something to answer a customer’s question and condoned the spreading out of an order that if executed by the book, would have caused a flash crash to match that of October 2016.
I think it is a real shame that there is an absolutism in the US legal system that seems to forego any sense of flexibility. I have no problem with jail sentences for fraudsters who rob people of their pensions and savings through misconduct, or for those who deliberately break the rules such as was the case with Jerome Kerviel and Nick Leeson. Both of those men are, I believe, rehabilitated and a jail sentence probably brought home to them the severity of their actions. There were no obvious rule breaches in either case, so surely some sort of extended community service (and maybe a fine) would suffice?
I don’t believe in the need to target individuals with harsh sentences for these actions, as has been highlighted previously in this column, once the banks were on the receiving end of massive fines they did what they should have done in the first place – clearly instruct and educate their staff that what was previously encouraged in some quarters simply wasn’t on, and that transgressions carried serious consequences.
So I have tremendous sympathy for any of these former traders facing jail – having recently spent just 14 days locked in a hotel room I can tell you even in good surroundings it’s no fun – and I remain unconvinced they deserve it. When it comes, however, to their actions that led to the incarcerations, I think they are radically different and in the case of Aiyer and Johnson it feels that one sentence is wildly out of proportion to the other – and inevitably you wonder why…