“Ohhhh, f—ing Christmas,” replied Mark Johnson, the bank’s global head of foreign-exchange cash trading, according to a transcript of a call recorded in 2011.
Now, his luck has turned. The details of the call were spelled out in a criminal complaint unsealed by federal prosecutors in Brooklyn on July 20, hours after Johnson was arrested by federal agents at New York’s John F Kennedy International Airport.
Prosecutors charged Johnson and a colleague, Stuart Scott, the former HSBC European head of currency trading, of fraudulently frontrunning a $ 3.5 billion currency trade for a client, in a deal that netted millions in profits for the bank.
Johnson, 50 years old, appeared in Brooklyn federal court on the afternoon of July 20. He didn’t enter a plea, and was released on $ 1 million bail. His lawyer declined to comment.
Scott, 43, hasn’t been arrested. His lawyer, Richard Beizer, didn’t respond to requests for comment.
Johnson’s arrest adds to a long list of legal woes for HSBC. In the highest-profile case, the bank avoided criminal charges over money laundering by entering a $ 1.9 billion settlement and five-year deferred prosecution agreement with the Justice Department in 2012.
The crimes alleged on July 20 pre-date that settlement and are unlikely to affect it, a person familiar with the matter said.
The bank also paid $ 614 million in 2014 to settle allegations it rigged benchmark currency rates. Scott was fired shortly after that settlement. The bank is still under investigation by the Justice Department for alleged rigging of the foreign-exchange market, and the charges filed July 19 grew out of that probe, people familiar with the matter said.
An HSBC spokeswoman said “HSBC has been and continues to cooperate with the DOJ’s FX investigation.”
According to the complaint, Johnson and Scott traded before executing an exchange of about $ 3.5 billion worth of dollars into British pounds – proceeds from a sale of part of the client’s stake in an Indian subsidiary. The pair in late 2011 used confidential information about the deal and the conversion to make lucrative trades for themselves and HSBC, and to the detriment of the client, prosecutors alleged.
The two men are each charged with one count of conspiracy to commit wire fraud.
Johnson and Scott weren’t accused on July 20 of rigging exchange rates, the focus of the broader investigation, but were instead accused of a practice commonly referred to as front-running.
The investigation into the two men and the bank is continuing, one of the people familiar with the matter said.
According to the complaint, HSBC won the bidding to help the victim company execute the currency conversion. The company planned to convert the money to pounds and pay it out to shareholders.
In the days and hours leading up to the $ 3.5 billion transaction, Johnson and Scott stockpiled millions of pounds in HSBC accounts, federal prosecutors alleged.
When the client went through with the transaction in December 2011, the two men executed it in a way that drove up the price of the pound, according to the complaint.
This allowed them to sell the currency they had purchased at a higher price while diminishing the client’s proceeds, because the conversion to pounds was done at a higher rate.
In a conference call in November 2011 discussing the coming transaction, an unnamed HSBC supervisor told Scott they should ramp up the market for British pound in a way that wouldn’t draw suspicion from the client, according to the complaint.
“[W]e don’t want…to push the market too much high[er] and at the same time we want to make money on this,” the superviser said on the call, the complaint said.
When the client noticed the price of the pound rising the day of the transaction, Johnson and Scott falsely blamed it on purchases by a Russian bank, according to the complaint.
The plan netted $ 3 million in trading profits and $ 5 million in fees for HSBC, prosecutors said.
A report on July 11 by the Republican staff of a US House of Representatives committee found that former Attorney General Eric Holder overruled an internal recommendation to prosecute the British bank for having opened up the US financial system to countries under sanctions and drug traffickers, allegations that HSBC admitted to as part of the 2012 settlement.
More recently, HSBC was part of a global probe of banks’ activities in foreign-exchange markets. Five banks paid billions in fines and four pleaded guilty to criminal charges in May 2015 as part of the Justice Department’s piece of that investigation.
The charges are the first against individuals to come out of the foreign exchange probe. As previously reported by The Wall Street Journal, prosecutors have used undercover cooperators and had indicated as long ago as 2014 that charges were near. But building cases has been a slow process.
Prosecutors had planned to charge Johnson at a later date but moved to arrest him on the evening of July 19 because they feared he was leaving the country, a person familiar with the matter said.
Johnson’s lawyer said in court on July 20 that HSBC was actually in the process of transferring Johnson from the UK to the US, and he was in New York making preparations for his wife and six children.
Write to Christopher M Matthews at firstname.lastname@example.org
Margot Patrick and Aruna Viswanatha contributed to this article, which was published by The Wall Street Journal