Not 'Christmas' After All: Feds Cite Taped Call in HSBC Execs' Fraud Case
Mark Johnson thought his HSBC (HSBC) - Get Report colleague Stuart Scott was joking, at first.
When Scott assured him that he wasn't, that a bank client had indeed approved moving ahead with the full amount of a $3.5 billion currency swap in early December 2011, Johnson expressed his satisfaction in three words, according to a criminal complaint filed in federal court in Brooklyn: "Ohhhhhh, (expletive deleted) Christmas."
The conversation, preserved on a recording of the phone call between Johnson, the head of global foreign-exchange cash trading at London-based HSBC, and Scott, the bank's former head of foreign exchange cash trading for Europe, is one piece of evidence in the government's wire-fraud conspiracy case against the two men, the Justice Department said Wednesday.
The disclosure followed Johnson's arrest late Tuesday at John F. Kennedy International Airport in Queens. The complaint was originally filed under seal because of concerns that Johnson, a U.K. citizen who also resided in the U.S., might flee the country.
HSBC didn't immediately respond to a request for comment on Wednesday.
Johnson, 50, and Scott, 43, engaged in front-running, the Justice Department said, using their advance knowledge of the client's planned purchase of British pounds -- which the company needed in order to distribute proceeds from the sale of an Indian subsidiary to shareholders -- to drive up the currency's price.
In late November 2011, before carrying out the client's transaction, Johnson made a purchase of British pounds in exchange for euros from an HSBC account he controlled, according to the complaint. Six days later, in New York, he instructed a currency trader to buy British pounds in exchange for dollars, authorities said.
The British currency obtained in both instances, as well as that obtained by Scott in a euro-linked purchase on Dec. 6, were sold for a profit once the client's transaction was completed, an investigator with the Federal Deposit Insurance Corp.'s inspector general's office said in the complaint.
On Dec. 7, the day the client chose to execute its trade, Johnson and Scott orchestrated more purchases of the British currency, realizing the client's trade would drive up its value and yield a profit, according to the complaint.
They also persuade the customer to execute the deal around a 3 p.m. "fix" -- an hourly currency-exchange benchmark -- rather than the more widely used 4 p.m. benchmark, which would have been more difficult to manipulate, authorities said.
When the customer began to question the resulting spike in the pound's value before its own trade was completed, a bank supervisor said it was because of trading by a Russian bank, according to the complaint.
Altogether, HSBC gained about $5 million from its execution of the trade as well as $3 million from the personal-book trades of the London- and New York-based currency employees, the FDIC agent said in the complaint.
"The defendants placed personal and company profits ahead of their duties of trust and confidentiality owed to their client, and in doing so, defrauded their client of millions of dollars," U.S. Attorney Robert Capers said in a statement. "When questioned by their client about the higher price paid for their significant transaction, the defendants wove a web of lies designed to conceal the truth and divert attention away from their fraudulent trades."