Mark Johnson, the head of global FX cash trading at HSBC and
Stuart Scott, former head of FX cash trading for EMEA at HSBC, have been officially
charged by the US Justice Department with conspiring to defraud HSBC clients by
front running orders.
Profit & Loss reported yesterday
on the reports emerging that Johnson had been arrested at JFK airport in New
York in connection with the Justice Department’s ongoing FX rigging
investigation, which have now been confirmed. Profit & Loss also reported on Scott’s dismissal from HSBC when it was revealed in December 2014.
alleged, the defendants placed personal and company profits ahead of their
duties of trust and confidentiality owed to their client, and in doing so,
defrauded their client of millions of dollars,” says US Attorney Robert Capers
of the Eastern District of New York.
“When questioned by their client about the higher price paid for their
significant transaction, the defendants wove a web of lies designed to conceal
the truth and divert attention away from their fraudulent trades. The
charges and arrest announced today reflect our steadfast commitment to hold
accountable corporate executives and licensed professionals who use their
positions to fraudulently enrich themselves.”
Attorney General Leslie Caldwell of the Justice Department’s Criminal Division
states that the defendants “allegedly betrayed their client’s confidence, and
corruptly manipulated the foreign exchange market to benefit themselves and
the authorities involved in announcing the charges appear keen to stress that
individuals are now being held to account in relation to the FX rigging
example, Caldwell claims that “This case demonstrates the Criminal Division’s
commitment to hold corporate executives, including at the world’s largest and
most sophisticated institutions, responsible for their crimes”, while
Frederick Gibson, acting inspector
general at the Federal Deposit Insurance Corporation (FDIC) says the case emphasises
that it is “critically important to hold individuals accountable for their
actions, particularly those who abuse their positions of public trust”.
Paul Abbate, assistant director in charge at the FBI’s Washington field office,
warns that “The FBI will continue to work aggressively with our partners to
prevent, investigate and prosecute criminal fraud in the financial markets.”
Front running accusations
According to the court documents
relating to this case, Johnson and Scott are accused of defrauding clients by
using information provided in confidence to HSBC to purchase sterling in
advance of the transaction, knowing that the transaction would cause the price
of sterling to increase, generating “substantial” trading profits for HSBC and
The court filing identifies this as front
running and notes that it is in breach of HSBC’s duty of trust and confidence to
to the complaint, in November and December
2011 Johnson and Scott misused information provided to them by a client that
hired HSBC to execute a foreign exchange transaction related to a planned sale
of one of the client’s foreign subsidiaries.
HSBC was selected to execute the foreign exchange transaction
– which was going to require converting approximately $3.5 billion in sales
proceeds into GBP – in October 2011. HSBC’s agreement with the client
required the bank to keep the details of the client’s planned transaction
Instead, Johnson and Scott allegedly misused confidential
information they received about the client’s transaction. On multiple occasions,
Johnson and Scott allegedly purchased sterling for HSBC’s “proprietary”
accounts, which they held until the client’s planned transaction was executed.
court filing alleges that the pair then caused the $3.5 billion purchase
of sterling to be executed in a way that made the currency spike in order
to benefit HSBC and defendants, in contrast to the bank’s commitment to its
clients to execute in their best interests and avoid unnecessary market impact
when trading their orders.
total, HSBC allegedly generated profits of roughly $8 million from its
execution of the FX transaction for the client, including profits generated
from the front running conduct by Johnson, Scott, and other traders whom they
The complaint also alleges that Johnson
and Scott made “material misrepresentations and omissions” to the banks’
clients in order to “further scheme by, among other things, concealing HSBC’s
role in the spike in the price of sterling”.
investigation is being conducted by the FDIC’s Office of Inspector General and
the FBI’s Washington Field Office. Trial attorney Melissa Aoyagi and
senior litigation counsel Carol Sipperly of the Criminal Division’s Fraud
Section and assistant US Attorney Jacquelyn Kasulis of the Eastern District of
New York’s Business and Securities Fraud Section are prosecuting the case.
charges in this case were brought in connection with the President’s Financial
Fraud Enforcement Task Force.