What to Make of the Cartel Acquittal?

An opinion from Galen Stops, editor of Profit & Loss

Shortly after we published the news that Richard Usher, Rohan Ramchandani and Chris Ashton, the three members of the now notorious “Cartel” chat room, were found not guilty of FX market manipulation by a New York court last Friday, my phone started buzzing.

Lots of the activity was WhatsApp messages and phone calls from various industry sources wanting to chime in regarding the decision, and one thing that has been interesting in the intervening time is that my sources seem to be split about whether they’re surprised regarding the outcome of the case.

“I know that they only release choice bits of the chat room transcripts to the public, but what came out looked pretty damning to me. I’m surprised that they’ve been able to get out of this one,” opines one market source.

By contrast, Henry Wilkes, the CEO of the London-based consultancy firm PointFX, comments: “I was not that surprised by the verdict because I always thought that to base the case on the evidence of one cooperating witness, who had negotiated a plea deal with the authorities, hugely undermined the prosecution’s case. The jurors accepted the defence lawyers arguments that the traders behaved in the same way as many other traders at that time and that there was insufficient evidence to convict the traders.”

Similarly, a former banker based in Europe suggests that the witness was problematic for the prosecution, texting: “If you put the ring master on the “good” side with mostly gossip and strong telling from what I saw….Then facts and a clever defense can pull this off. A shame that Johnson only had a strong witness but weak counsel.”

One US source with a legal background expresses less surprise at the verdict than how quickly it was rendered.

“It’s very surprising that it was such a quick acquittal, that means that there was basically no one in the jury resisting [the decision], it was just a slam dunk. That quick of an acquittal rarely happens in complicated cases, it suggests that basically no one bought the prosecutors case,” they say.

Commenting on the acquittal in light of the wrongful dismissal claims that individuals have won against banks in relation to FX malpractice, the source adds: “This just shows you how hard it is to make these cases under current laws.”

What next?

Broadly speaking, I see three potential responses to this case. The first is that people might say that if these three people didn’t break the law then it’s proof that the laws need to be strengthened around what constitutes market manipulation. The second is that they might conclude that the line of argument from the prosecution was flawed and that they simply didn’t make a strong enough case. And the third is that the conduct that was revealed during the court case didn’t contravene any laws and therefore no action is needed.

Having said this, it’s worth pointing out that the reality is that this case will garner very little attention or reaction amongst the general public.

Wilkes argues that the verdict last week indicates that the case was handled badly, and not necessarily that the traders were completely innocent.

“My concern is that by arguing that these traders were merely acting in the same way as most other traders at that time is not a vindication of their innocence and doesn’t justify unacceptable market practice,” he says.

And this is where the FX Global Code of Conduct could, in theory, come into play.

While I’ve spoken to people who have agreed with the acquittal of The Cartel members on the basis that a few individuals were being singled out for what was more of a systemic problem within certain institutions, and because they felt that no actual laws were broken, I have yet to find anyone who considers their behaviour desirable for the FX market.

Although the Code sometimes gets a lot of stick because of its “quasi regulation” status, whereby those involved in its creation – including central banks – strenuously remind the market it is not, and does not have the status of, regulation all the whilst simultaneously emphasising that not adhering to it could have negative consequences for firms in the market.

Thus the Code could offer a means to change FX market behaviour in a positive way, without having to change the laws governing financial services firms themselves. But could last week’s acquittal impact the adoption of the Code? After all, if it’s not regulation and there’s no legal consequences to behaviour exhibited by The Cartel, why be concerned with it?

Just to play devil’s advocate for a second……

On Monday, my colleague, Colin Lambert, managing editor of Profit & Loss, addressed this issue in his column, and (as ever) impassionately argued that this decision does not undermine the Code.

Reacting to a Bloomberg article on the acquittal, Lambert stated: “I understand there is a need to get people reading a story but to state, as the article did, that the decision is “a blow to global efforts to police the industry” is plain wrong”

He shortly thereafter added: “The Bloomberg story also quoted [Mayra Rodriguez] Valladares as saying the FX Global Code will be seen as having no teeth – in fact the whole tone of the article to me was one that said the Code has been undermined by this decision. Nonsense. Technically speaking there may be some merit in that argument (I don’t think there is obviously), because the document is a best practice guideline and not a legal rulebook. If, however, as has happened, market participants adopt the Code and make it clear to their staff that these are the guidelines within which they must work, then it does have teeth.”

Zeus Shaikh, founder of the consultancy firm, Bear Shaikh, takes a similar stance in expressing optimism that the FX industry will not view the acquittal as a negative for the Code, although he appears more skeptical about the supposed “teeth” of the Code.

“I would hope that the FX community would agree that an acquittal of these individuals does not lead to the conclusion that the markets do not benefit from what the FX Code purports to provide: a pledge to promote the integrity and efficiency of markets. Although the Code is rightly criticized for having “no teeth,” it does not follow logically that this acquittal proves that conclusion. Nor does it follow that the Code is bad for the industry. At the very least, it promoted some needed conversations about last look and pre-trade hedging,” he says.

While my personal feeling is that the acquittal will do little to stop the momentum of Code’s adoption, I do think it’s worth taking a moment to acknowledge the other side to this argument, however.

“This [judgement] could be seen as tolerating lower standards of market behaviour and best practice which would discourage buy side market participants from signing up to the Code,” states Wilkes, and here he makes a key distinction by referring specifically to the buy side, which, as Profit & Loss has pointed out in the past, as a group has been slow to commit to the Code thus far.

Wilkes’ comments reminded me in particular of a point that was made by a speaker at our Forex Network Chicago conference in September. The speaker pointed out that upon examining the list of firms that had committed to the Global Code they noticed one bank on the list that had only recently been in the media facing accusations of overcharging its customers for FX trades. As a result, they suggested that buy-side firms could reasonably conclude that nothing has really changed despite the introduction of the Global Code.

Yes, this is just one person’s perspective and may not be representative of the buy side, which is, after all, a highly diverse group. But I can certainly imagine the possibility that the news of this acquittal will breed further cynicism amongst this group about the ability to actually hold firms and individuals to account for what I think that most people agree was, if not illegal, then certainly bad behaviour in the FX market.

Too much, too soon?

The acquittal also raises other interesting questions though. One of which is, in light of last week’s decision, should the banks really have shelled out billions of dollars to settle accusations relating to FX market manipulation? It seems logical this if these individuals didn’t break the law, then how could the banks have done so?

Overwhelmingly, market sources seem skeptical that the bank’s made a misstep in this regard.

“The result in this particular trial mean doesn’t mean that the banks should not have settled their cases. Any trial may be difficult to predict; it was just last week that counsel for these very defendants filed a letter with the court objecting to some damaging Matthew Gardiner testimony and requesting a mistrial,” says Shaikh.

It should go without saying that, when the defence is requesting a mistrial, it is generally not a sign that they feel like they’re winning the case. Another source highlights that a bank’s calculus with regards to legal cases can be much more complicated than most people realise.

“For a bank to say that they were acquitted at trial is not necessarily better for them than saying they settled. As far as they see it, it’s all just controversy,” they add.

Meanwhile, Wilkes points out that it’s important to remember the broader pressure being applied to the banks by regulators around the time that they settled the FX accusations.

“My sense is that it was very tricky for the banks to push back on the regulators at that time because they were fighting them on a number of fronts and the FX scandal was an easy one to add to the list to bash the banks,” he says.

Wilkes adds: “Also it is worth bearing in mind that the senior executives at the banks that ended up paying the largest fines, were being challenged and questioned as to the quality of their senior management and the standard of controls and supervision of the underlying business such as FX. The highest standards of market practice were not being adhered to by all staff and this can ultimately have a detrimental impact on their clients such as asset managers, pension funds and insurance companies.”

A couple of final thoughts

Another question that springs to mind: what to make of the US Federal Reserve’s decision to hit Ashton with a $1.2 million fine and a permanent ban on employment in the banking industry  in 2016 based on his supposed malpractice in the FX market? A decision that was formalised in 2017 and then upheld earlier this year despite an appeal from Ashton.

I went to the Fed for comment on this question but had not received any response at the time of writing. Indeed, market sources seem generally unsure how to answer this question, beyond one pointing out that getting banned requires a different standard of proof to getting a conviction in a court of law, and that the Fed might satisfied that at least it isn’t going to be accused of being soft on bankers.

Yet another question that this acquittal raises is whether or not authorities will be discouraged from bringing charges for similar FX market manipulation cases in the future.

“You would hope that it doesn’t, but the DoJ responds to jury decisions. When juries fail to convict on cases, people get anxious taking cases that aren’t absolute certainties,” says the US source.

Again, they point out that the speed of the jury decision in this case could be significant.

“It’s relevant to how a prosecutor will respond. When you lose a case that was deliberated on for ten days you’ll take away different lessons compared to one that was deliberated on for one day,” they say.

The flip side of this though, they add, is that the demand for action against financial malpractice from the general public is not likely to dissipate significantly any time soon.

One final point perhaps worth musing, although this is a question that can never be answered, is whether a jury outside of New York would have treated this case differently. Jury pools matter a lot, and in London and New York defence lawyers have some of the most financial-friendly jury pools going, on the basis that the people within are much more likely to know more about the financial industry or at the very least know people who work in finance. People have a right to be tried by their peers, so it’s understandable that authorities prefer not to move cases around unless it is really necessary for some reason, but it is a point of curiousity for me whether this case and others similar to it would have fared different outside these financial hubs.


Galen Stops

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