Johnson Loses Appeal Against Conviction

In what may be a significant decision for the foreign exchange industry, former HSBC head of cash FX trading Mark Johnson has lost his appeal to have his conviction and sentence overturned in the US.

In their decision, justices Calabresi, Lohier and Donnelly, say: “We conclude that there was sufficient evidence to convict Johnson on the right‐to‐control theory because a reasonable jury could conclude that his misrepresentations to Cairn related to the price of the transaction and were capable of influencing Cairn’s decision making.”

The appeal court finds that Johnson “directed [former HSBC spot trader Frank] Cahill, his trader, to ramp the fix rate to just under 1.5730, 100 pips above where the GBP/USD rate had started. Johnson therefore deceived Cairn with respect to both how the FX Transaction would be conducted and the price of the FX Transaction.”

The ruling document adds, “In our view, there was sufficient evidence that Johnson made at least two material misrepresentations capable of influencing Cairn’s decisions. First, during his October 2011 phone call with Jarrosson, Johnson represented that HSBC would not ‘ramp the fix’. A reasonable jury could point to the evidence of Johnson’s subsequent efforts to conceal HSBC’s role in ramping the fix for HSBC’s benefit and to Cairn’s detriment as proof that Johnson knew that this statement was false. Johnson argues that his statement to Jarrosson was not a lie because he informed Jarrosson that HSBC would buy pounds before the fix was set.

“We agree, based on the trial evidence, that Johnson disclosed HSBC’s intent to trade ahead of the fix,” the ruling adds. “But in doing so Johnson also misrepresented the method by which HSBC would trade ahead. As noted, he confirmed that HSBC would “quietly” accumulate its position in pounds and suggested that HSBC would not “ramp the fix,” knowing how important each of these representations about process was to Cairn. Contrary to these representations, however, Johnson directed Cahill to ramp the fix to a rate just below 1.5730.

“There was ample evidence for a reasonable jury to find that Johnson’s misrepresentations not only could, but in fact did, influence Cairn’s decision as to the type of transaction to undertake,” it continues. “After his phone call with Johnson, Jarrosson recommended that Cairn engage HSBC to do a Fixing Transaction; HSBC and Cairn signed the Mandate Letter, which described a Fixing Transaction as one of two alternative methods (the other being a Full‐Risk Transfer); and Cairn ultimately selected a Fixing Transaction. Johnson contends that none of his misrepresentations were material because the cost to Cairn would have been even greater had it elected to proceed with a Full‐Risk Transfer rather than a Fixing Transaction. We reject that argument because it rests on a misunderstanding of the question before us. As we have explained, the “question of whether a defendant’s misrepresentation was capable of influencing a decision maker” in a right‐to‐control case “should not be conflated with [the] requirement that that misrepresentation be capable of resulting in tangible harm.”

Of particular concern to the foreign exchange market could be the appeal judges’ response to Johnson’s argument that the mis-information regarding the Russian central bank selling dollars (which was actually stated by his colleague Stuart Scott) was immaterial because it was post-transaction. The judges state, “But Cairn was not stuck with the FX Transaction once it was completed. It could have sought to unwind the transaction before settlement, withhold payment, or seek immediate legal action on the ground that it had been defrauded. We think that a reasonable jury therefore could have viewed Johnson’s post‐transaction misrepresentations as influencing Cairn’s decision not to pursue these various courses of action immediately after the fact.”

Equally significant, the appeal court judges note that Johnson was not convicted of front-running, or pre-hedging, but of misrepresenting to the customer how the bank would trade.

Johnson was convicted and sentenced to two years’ imprisonment in April 2018 ahead of the appeal.

Colin Lambert

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