HSBC conducted its own investigation three years ago into a $ 3.5bn currency trade that US prosecutors now believe was criminally fraudulent but found nothing wrong with the transaction, according to people briefed on the internal HSBC probe.
The HSBC review, conducted in the wake of a sweeping foreign exchange rigging scandal that erupted in 2013, was led by an external lawyer and found no breach of its code of conduct. HSBC declined to comment.
The bank was on Thursday reviewing its own investigation of the $ 3.5bn forex trade to decide whether to support Mark Johnson, its global head of forex cash trading, who was arrested on Tuesday evening at New York’s John F Kennedy airport.
A warrant has also been issued for the arrest of Stuart Scott, who was head of forex cash trading for Europe, the Middle East and Africa until he was fired by HSBC for separate conduct issues in 2014.
A solicitor for Mr Scott in London strongly denied the allegations on behalf of her client, who is UK-based. While a warrant for Mr Scott has been issued, US authorities are yet to apply formally for his extradition.
HSBC reviewed its $ 3.5bn purchase of sterling for Cairn Energy in 2011 along with many other forex trades as part of an internal remediation exercise that it carried out at the request of regulators when the wider forex rigging scandal erupted in 2013.
People briefed on the matter said the bank’s internal investigation found no breach of its code of conduct when it reviewed the trade carried out for Cairn by Mr Johnson and Mr Scott.
The US Department of Justice alleges that the traders cheated their client by deliberately buying sterling ahead of the customer’s $ 3.5bn purchase of sterling and reselling it to the client at higher prices.
US authorities allege that the traders used a technique known as “ramping” that caused the price of pounds to jump. That rise benefited the bank’s trading book at the expense of the client, which then paid a higher price for the sterling.
When Cairn challenged HSBC about sharp increases in sterling ahead of the trade, an unnamed supervisor, working with the bankers, then allegedly misled the client by blaming the price increase on a “Russian” bank in the market, US authorities said.
The complaint adds that Mr Johnson was surprised Cairn went ahead with the transaction. When told of the company’s commitment, he responded “Ohhh, f***ing Christmas”.
After banks paid $ 10bn in fines to US and UK authorities, they complained that spot forex was not included at the time within the UK’s criminal market-abuse regime. A decision by the UK’s Serious Fraud Office earlier this year to drop its criminal investigation into forex-rigging seemed to bolster that argument.
However, the Justice Department is accusing the pair of breaching a far more sweeping law: that of wire fraud. The authorities basically accuse them of deceiving their clients for gain.
Roger Burlingame, a former chief prosecutor at the New York office that is bringing the case, and who is now based at law firm Kobre & Kim, explained: “The defendants are charged with wire fraud. This simply means the government has alleged that they’ve used an electronic communication in the US to commit a fraud.
“The statute uses the broad, standard definition of fraud; it’s not a technical scheme targeting market abuse in particular. The same statute is used to prosecute any kind of fraud that involves email, phone calls or texts.”
A person familiar with the SFO’s thinking told the FT that the agency had not looked at the $ 3.5bn trade for Cairn and instead was focused on more generalised collusion and rigging within the $ 5tn-a-day forex market.
Legal experts said that even under UK law, if a bank acting as an agent for its clients can be proven to have defrauded them through deceit then this would be illegal in the UK too. That is important as in order to extradite Mr Scott, the US must persuade a UK court that the alleged wrongdoing was illegal both in the UK and the US at the time.
Mr Johnson was in the process of moving to New York and transitioning to a new job as head of forex and commodities in the Americas, which one person familiar with the move said was not a promotion but “more of a sideways move”.
The arrest could cause reputational damage to the global bank’s forex trading business and fuel more calls for HSBC to face full criminal charges. The DoJ has already been criticised for failing to prosecute HSBC after it paid $ 2bn in 2012 over laundering billions of dollars for Mexican and Colombian drug gangs.
But because the alleged wrongdoing happened before it signed a deferred prosecution agreement in 2012 bank insiders think it is unlikely to put it in breach of the deal to avoid prosecution that is due to expire next year.
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