HSBC’s Forex trader arrested over $8m illicit profit from a $3.5bn deal

Banks including HSBC paid $5bn in regulatory fines twenty months ago, over their role in rigging foreign exchange benchmark scandal. This week, its British head of Forex cash trading Mark Johnson was arrested by US authorities at New York’s John F Kennedy Airport, and an arrest warrant was granted for his former sub-ordinate, Stuart Scott, who remains in UK.

US authorities accuse the pair of making $8m in illicit profit form “front running” a $3.5bn forex deal conducted by HSBC in 2011 on behalf of a client, Cairn Energy.

The US Department of Justice accuses them of cheating the client by deliberately buying pounds ahead of the deal, knowing it would push up the price of the sterling that they were then reselling to the client at a higher premium.

Mr Scott’s solicitor strongly denied the allegations and Mr Johnson, however did not get an opportunity to plead. Mark Johnson leaves a US district court in Brooklyn after posting a $1m bail.

The deal was included in an internal review commissioned by HSBC in December 2014, part of the compulsory exercise ordered by the UK’s Financial Conduct Authority, after the forex fines. The report conducted by Cleary Gottlieb, the New York law firm, which concluded that no breach of HSBC’s code of conduct took place.

Back in 2011, spot forex, was not part of the market abuse regime in the UK – a serious loophole since been closed. Hence, front running and other known and unknown scams might be considered not technically illegal if tied to spot forex. The offences the pair are charged are of a broader nature including a wire-fraud conspiracy to defraud their client using “false and fraudulent pretences” and the misuse of confidential client information. Defrauding a client by misusing confidential information is also a crime in the UK. It is easier for the prosecutors to prove a conspiracy if it were acting as an agent rather then principle according to lawyers.

It is likely that HSBC was acting as both principle as well as agent and this is indeed a conflict of interest, which all banks had to face in the forex investigation, between their client facing and market-making activities. In Forex market traders often indulge in pre-hedging when executing orders and requests.

Banks have paid over $10bn in fines to regulators over the forex scandal. HSBC has paid $618m to US and UK regulators, and still subject of criminal probe.