LeapRate's Daily Forex Industry Newsletter
Join now to receive first access to our EXCLUSIVE reports and updates.
Screenshot of a breaking news alert e-mail from Q2 2017
Former HSBC Holdings plc (ADR) (NYSE:HSBC) global head of foreign exchange cash trading Mark Johnson pleaded not guilty today in U.S. criminal court to charges that he participated in a fraudulent scheme to front-run a $3.5 billion currency transaction by one of the bank’s clients.
Mark Johnson was arrested in July and became the first person to be criminally charged in the U.S. Justice Department’s three-year probe into forex rigging at global banks.
What is ‘front running’?
Front running is the practice of a broker executing orders on a security for its own account, while taking advantage of advance knowledge of pending orders from its customers. The front running broker either buys or shorts for its own account before filling customer buy/sell orders that drive up/down the price. Front running is illegal and considered unethical since the broker is making a profit at the direct expense of its own customers.
The not-guilty plea on charges of wire fraud and conspiracy was entered by Mr. Johnson’s lawyer Frank Wohl in U.S. federal court in Brooklyn. Mr. Wohl made a brief statement after the hearing saying:
He pleaded not guilty because he is not guilty.
He’s done nothing wrong.
The U.S. DoJ investigation led to four banks last year pleading guilty to conspiring to manipulate currency prices. HSBC was not among those banks, but in 2014 agreed to pay $618 million to resolve related probes by U.S. and British regulators.
The U.S. Justice Department has continued to investigate, and HSBC has set aside $1.2 billion to cover various forex-related probes.
Prosecutors said that Johnson (and Stuart Scott, HSBC’s former head of cash trading for the EMEA region), misused information provided by a client that hired HSBC in 2011 to convert $3.5 billion to British pounds in connection with a planned sale of the client’s foreign subsidiaries.
Johnson and Scott then used their insider knowledge to trade ahead of the transaction, causing a spike in the price of the currency that hurt HSBC’s client, prosecutors said.
The client was not named in court papers, but Reuters cited a source saying that it was British oil firm Cairn Energy PLC (LON:CNE).
In total, HSBC earned $3 million from trades its currency traders placed, and $5 million from executing the transaction, according to prosecutors.
Another interesting note is that one of the prosecutors on the case, Melissa Aoyagi, said at the hearing that the Justice Department was in ‘discussions’ with Johnson’s lawyer, despite the straight not-guilty plea. She did not elaborate, but did mention that prosecutors were turning over to the defense ‘voluminous’ amounts of evidence.
HSBC on Monday said it is monitoring developments and is liaising closely with U.S. authorities in their ongoing investigation.
In the meantime Johnson – a British citizen – is free on bail in the US.
The case is listed as U.S. v. Johnson et al, U.S. District Court, Eastern District of New York, No. 16-cr-00457.