HSBC Global Forex Head arrested in New York
HSBC's Global Head of Foreign Exchange, Mark Johnson, has been arrested at New York's John F Kennedy Airport for allegedly using a client's confidential information for making $8 million profit from a $3.5-billion deal. The US Department of Justice accused Johnson and his former colleague, Stuart Scott, of fraudulent forex transactions. Robert Sherman, HSBC Spokesman, stated they were cooperating with the Justice Department's investigation.
Cairn Energy seeks a bank for currency conversion
UK-based Cairn Energy entered into an agreement with a company to sell a part of its Indian subsidiary's ownership interest, subject to regulatory approvals, approximately for $3.5 billion. Cairn planned to convert the $3.5 billion sale proceeds into Pound Sterling and distribute it to the shareholders once the deal was approved. Eventually, Cairn sent a proposal to ten banks seeking the currency conversion.
HSBC picked to manage the trade
In Oct'11, Cairn Energy picked HSBC to execute the $3.5 billion foreign exchange transaction. The bank had agreed to the company's condition for keeping the information confidential and not to trade on the same. Subsequently, Mark Johnson, Head of Global Foreign Exchange Trading at HSBC, and Stuart Scott, Head of Foreign Exchange Cash Trading (Europe, Mid-east, and Africa) at HSBC, were brought in.
Johnson and Scott bought Sterling prior to forex transaction
On 28 Nov'11, HSBC traders received information that Cairn Energy's transaction might occur in the next few days. Subsequently, Johnson bought some Pound Sterling in exchange for Euros that were booked in his proprietary trading book. On 5 Dec'11, the sale of Cairn's Indian subsidiary was approved. During 5-6 Dec'11, Johnson and Scott bought more pounds while Cairn actually transacted on 7 Dec'11.
HSBC currency traders' purchases were front-running
The Sterling purchases by Johnson and Scott were allegedly front-running schemes to profit HSBC and themselves in turn. On 7 Dec'11, Cairn intended to transact at the "4 pm fix" (hourly benchmark forex price), to buy pounds in exchange for USD. However, HSBC told Cairn Energy and its adviser to trade at the "3 pm fix" and received the order for £2.25 billion.
Sterling/USD prices spiked during the transaction
Johnson and Scott had a live order for '3pm fix', which wasn't that liquid. They were in contact before and during the transaction and allegedly planned that if they transact half-hour prior to the fix, the forex price will go up. The price of the Sterling/USD before the 'fix' was lower; during the transaction 'fix' the price had increased (highest of the day).
Cairn questions about spiked price
Cairn questioned about the spiked Sterling/USD price during the fix, Johnson and Scott blamed a Russian bank for the price movement. Cairn was assured that the transaction "went okay", following which the transaction was settled; charges for processing and others was paid to HSBC.
HSBC fined for forex rate manipulation
In 2013, British markets supervisor, The Financial Conduct Authority, had opened a probe into manipulation of forex prices. One of the largest European money managers had filed a complaint with the FCA about possible manipulations within a year. In 2014, HSBC, along with five other banks, was fined by the FCA over manipulation of the foreign exchange prices by its currency traders.
Convinced client to place an inefficient order.
Mark Johnson, accused of front-running by DoJ, was released on a $1 million bail later. Johnson supervised Scott during 2010-14; they allegedly convinced a client to place an inefficient order, fraudulently executed and concealed it. They encouraged the victim to make a foreign exchange transaction at a 'specific' time that was advantageous to HSBC and in turn themselves in 2011.
US Attorney Robert Capers stated: "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."