Former HSBC Executive Convicted of Fraud for Front-Running -- 2nd Update

A federal jury in Brooklyn on Monday found a former high-ranking HSBC Holdings PLC executive guilty on charges that he misused information about a client's $3.5 billion currency trade to make millions of dollars for the bank.

Mark Johnson, HSBC's former global head of foreign-exchange cash trading, was the first banker to face criminal charges stemming from a U.S. Justice Department probe into foreign exchange rate manipulations. He was convicted on eight counts of wire fraud and one count of wire-fraud conspiracy; he was acquitted on a ninth wire-fraud count.

Lawyers for Mr. Johnson couldn't immediately be reached for comment.

"Mark Johnson exploited confidential information provided by a client of the bank to execute trades that were intended to generate millions of dollars in profits for him and the bank at the expense of their client," Bridget M. Rohde, the acting U.S. Attorney in Brooklyn, said in a statement. She said the office would continue to prosecute those who "undermine public confidence in the operation of the financial markets by engaging in fraudulent schemes."

A sentencing date hasn't been set. The wire fraud charges carry a maximum sentence of 20 years in prison.

A spokesman for HSBC didn't immediately respond to requests for comment. Mr. Johnson left HSBC earlier this year.

Mr. Johnson, a British citizen, wasn't accused of rigging exchange rates, the main focus of the broader Justice Department probe.

Instead, he and a colleague, Stuart Scott -- HSBC's former European head of currency trading -- were charged in connection with a practice known as front-running, in which someone with advance knowledge of a major market order buys for their own account, then earns a profit when the larger transaction drives up the price.

Mr. Scott, who left HSBC in 2014, is in the U.K. fighting extradition and wasn't tried alongside Mr. Johnson. A lawyer for Mr. Scott couldn't immediately be reached for comment.

In 2011, HSBC won the bidding to handle the conversion of $3.5 billion worth of dollars into British pounds on behalf of Cairn Energy PLC, an Edinburgh, Scotland-based oil-and-gas company, according to evidence presented at trial.

Prosecutors alleged that the days and hours leading up to the transaction, HSBC traders in London and New York stockpiled millions of pounds in HSBC accounts, at Mr. Johnson's direction. At trial, jurors heard recordings of phone calls that prosecutors said showed Mr. Johnson using coded language to fellow currency traders to set off the buying spree.

When the transaction went through, on Dec. 7, 2011, Messrs. Johnson and Scott executed it in a way that drove up the price of the pound, prosecutors alleged, allowing them to sell HSBC's stockpiled currency at a higher price, while Cairn's proceeds from the exchange shrunk.

"This is not a coincidence -- this is a conspiracy," Brian Young, a trial attorney for the Justice Department, said in the prosecution's closing arguments.

The scheme netted $3 million in trading profits and $5 million in fees for HSBC, prosecutors said.

Prosecutors used cooperating witnesses and the bank's recordings of Mr. Johnson's phone calls to argue he and others had conspired to use the client's confidential information to make money for HSBC and secure larger bonuses. "This is not how people talk when they are engaged in honest business transactions," Mr. Young said in closing arguments.

When Cairn noticed the rising price of the pound that day, another HSBC employee blamed it on purchases by a "Russian buyer," according to evidence presented at trial.

In one phone call recorded by HSBC and played at trial, Mr. Johnson said to Mr. Scott, "I think we got away with it." Mr. Johnson's lawyer said the statement reflected concern about the other employee's "misrepresentation" about the Russian transaction.

During the trial, lawyers for Mr. Johnson argued that he had been acting in the client's best interest, that prosecutors were trying to criminalize normal currency trading activity and had twisted their client's words to create the illusion of a conspiracy. In closing arguments, defense lawyer John Wing said prosecutors hadn't found "evidence of anything remotely close to criminal conduct."

Mr. Johnson, who was arrested at John F. Kennedy airport in New York in July 2016, testified in his own defense at trial, at times seeking to explain comments he made in the recorded calls as jokes or misunderstandings.

Earlier in October, the U.S. Federal Reserve fined HSBC $175 million for failing to adequately supervise its foreign-exchange trading business, citing the alleged conduct by Messrs. Johnson and Scott as examples of the lack of oversight.

In 2012, the bank avoided criminal money-laundering charges by entering into a $1.9 billion settlement and a five-year deferred prosecution agreement with the Justice Department. In 2014, the bank paid $614 million to settle allegations that it rigged benchmark currency rates.

(END) Dow Jones Newswires

October 23, 2017 14:52 ET (18:52 GMT)