The defence team conducting former HSBC FX trading head Mark Johnson’s appeal against his conviction in late 2017 have filed their appeal brief to the US Court of Appeal, in which they argue that the US Government’s brief offers, “…the latest flavour of the prosecution’s many ever-shifting, imprecise, and contradictory attempts to explain just what, exactly, the crime here was, and it exposes why there was none.”
The defence appeal brief argues that the misappropriation theory, which was a mainstay of the Department of Justice’s (DoJ) case is now “an afterthought”; that it refuses to accept contractual provisions that set out the non-fiduciary relationship between HSBC and Cairn Energy; and that “The Government seeks to rewrite a freely negotiated agreement between sophisticated parties who disavowed the very duty the prosecutors now seek to impose.”
The appeal further notes, “It would be a travesty of justice to deprive Johnson of his liberty based on these arguments, which would not even survive a motion to dismiss in a civil action.”
The document also takes aim at the DoJ’s “right to control” argument, stating it is similarly foreclosed by controlling law and the governing contract. “The Government says it only has to prove that the victim was deprived of economic information, but completely ignores the additional requirement that the victim receive less than ‘the full economic benefit of its bargain.’ The Government disregards this precedent because Cairn got everything it bargained for,” Johnson’s team argues. “As the government concedes, Cairn neither sought nor received any limitation on HSBC’s profits in the contract. Nor does the Government seriously suggest that the miniscule 0.2% profit somehow violated a contract that imposed no such limit.”
The appeal then goes on to highlight “a litany of new, equally meritless theories of deceit and intent to harm. These bogus theories are nowhere in the indictment, were not presented to the jury, are unsupported by the record, and cannot sustain the conviction,” the appeal brief argues. “Not only do they contradict what the government said below, the Government’s brief repeatedly contradicts itself, typifying the lack of fair notice or coherent standard of criminality that has become the single defining feature of this prosecution.”
To stress the apparent uncertainty of the Government’s case, the appeal brief notes several instances of a new argument being introduced into the case by the prosecutors that were not part of the jury trial. It notes that the DoJ argues for the first time that HSBC’s receipt of confidential information by itself creates the requisite duty, “which directly contradicts the governing law, the jury charge, and its concessions below”.
Furthermore another first time claim is that a relationship of “confidence” is enough to prove guilt rather than the Government’s unsuccessful attempt to prove the two parties had a relationship of “trust and confidence”. As Johnson’s team points out, this theory was not even considered by the convicting jury, which had been instructed that merely entrusting someone with information “does not, without more, give rise to a relationship of trust and confidence”.
The government has also introduced other arguments for the first time at the appeal stage, claiming that HSBC traders personally profited from the deal, that it promised a “drip feed” execution methodology, that the bank “harmed” Cairn by selling sterling to third parties and that alleged misrepresentations pre-dating the trade settlement are now material. “These allegations are nowhere in the indictment or the prosecutors’ jury argument, and none withstand the slightest scrutiny”, the appeal brief claims.
Another new argument, that seems somewhat bizarre from the standpoint of how the FX market works, is the Government’s claim that other HSBC employees’ statements after the trade had been executed sought to influence the decision of Cairn to settle the trade. As the appeal document points out, once the transaction was executed Cairn did not have the right to withhold payment to HSBC.
Finally in terms of new arguments introduced, the appeal notes how the DoJ’s now argues that the method of execution was what was wrong, in that had HSBC bought the sterling in “multiple tranches”, “there would be no dispute that the profit was earned honestly”.
As Johnson’s appeal highlights, the bank did buy sterling in multiple tranches and it observes how even the Government’s brief admits HSBC staggered its buying and now “claims that this is what made Johnson’s conduct criminal”.
As well as introducing new arguments to the case that the original jury did not hear or deliberate upon, Johnson’s appeal brief also points out several occasions where the Government has back tracked on some of its original claims.
Most importantly, the prosecution has conceded that Johnson did make the disclosure to Cairn and its advisors that the bank would earn profit by trading ahead of the Fix, or pre-hedging. This was a central theme of its original case, although it also apparently contradicts one of its newer arguments, that the traders profited personally, by admitting that “the profits from the[se] trades went to…HSBC and not to the conspirators personally.”
Another apparent about-face in the Government’s case is its original assertion that HSBC may not have been selected by Cairn had the company received different disclosures and information about how the trade was to be executed. “There is no evidence of another bank or exchange methodology that would have achieved a better rate for Cairn,” Johnson’s appeal document states. “And the Government now concedes that it lacks actual “proof” of “an alternative method of transaction or a different bank to execute the trade.”
Johnson’s team also point out that the Government “does not dispute” that its own expert witnesses were unable to offer an alternative method.
In seeking to have the conviction overturned, the appeal brief argues, “The Government’s brief is Exhibit A of the due process problem pervading this prosecution. It remains unclear, apparently even to the prosecutors, just what Johnson’s crime was. They have abandoned their central argument to the jury: that Johnson supposedly concealed HSBC’s intent “to trade ahead [of the fix] and…move up the price of [the pound], because doing so would cost money to [Cairn].
“Now the government concedes, as it must, that this “was obvious” and something Cairn “understood.” The government here repeatedly insinuates that traders personally profited in something resembling an insider trading scheme – but admits in the fine print that they didn’t profit at all. Then the government posits that “what makes the scheme criminal…is that Johnson and Scott…placed trades ahead of Cairn” that were “not for the purpose of filling Cairn’s order”, even though these trades either had no effect on or improved the exchange rate for Cairn, and a trading methodology that benefits the victim obviously is not a crime.”
The brief also argues that the government “continues to flip-flop” about whether and to what extent HSBC could profit from the transaction, noting that it told the jury that HSBC’s entire profit was fraudulently obtained and that Johnson cheated Cairn out of its valuable property, but elsewhere, claims its concern was limited to the size of the profit. “On appeal, the government continues to vacillate, it argues. “Sometimes it argues that the entire profit was ill-gotten. But it elsewhere suggests that the problem is that HSBC profited “unnecessarily.” Yet the government does not even attempt to resolve these contradictions.”
The appeal brief concludes by arguing that, contrary to the Government’s position that it is not a novel case, that the charges against Johnson are “unprecedented” for which the reason is “clear”, namely that the government is “shoehorning [Johnson’s conduct] into statutory sections where it does not fit” and as such “this prosecution violates due process.”
The case will now move to the oral arguments phase ahead of a final decision later this year.